Wednesday, July 08, 2009

Halachos of Interest

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Punishment of Ribbis
By: Hakhel

What prevents one from arising at T’chiyas HaMeisim? The Chofetz Chaim (ibid.) quoting Chazal (Sotah 5A) states that the sin of gaivah (arrogance) prevents a person’s earth from moving during T’chiyas HaMeisim. Additionally, lending money with interest prevents one from arising (Pirkei D’Rebbe Eliezer 33). Even if a Heter Iska is used, the Chofetz Chaim writes, one must make sure that it is properly completed in order for it to be valid.

We must advise that there are a number of improperly worded Heter Iska documents in current use which are completely invalid, rendering loan transactions made through them bone fide ribbis. For example, the phrase “in lieu of the sharing of profits and losses,” or “it has been agreed… (followed by language which does away with the sharing of any form of losses)” voids the Heter Iska. Additionally, language which provides that “these payments will continue until the original loan is paid in full” (which has the effect of guaranteeing payment of the principal) voids the Heter Iska, as well.

By: Rabbi Doniel Neustadt

Although the Biblical prohibition against charging interest (ribbis) on a loan is well-known, few people are aware of the many applications and ramifications of the laws of interest. Transgressing these laws could result in the violation of up to six negative commandments according to the Rambam, so it is imperative that we examine some everyday situations where the laws of interest apply.

A loan may not be made with conditions which will benefit the lender. He may not stipulate that in exchange for the loan, the borrower should patronize him, refer others to his or another person's business, be given a job, or make a donation to tzedakah. It is permitted, however, to lend money with the stipulation that the borrower will accept a job offer or take a course, etc., if the lender's aim is solely to benefit the borrower or to ensure that his loan will be repaid.

It is forbidden to lend money to a handyman on condition that he will work for the lender at a lower wage.

It is forbidden to borrow another person's credit card to make a purchase on which the borrower makes monthly payments with interest. Similarly, it is forbidden to borrow another person's credit card to obtain a cash advance. These transactions are forbidden because legally, the owner of the card is responsible for the payments. In effect, it is as if the borrower is borrowing money from the credit-card owner and then repaying him the principal plus interest.

It is permitted to borrow another person's credit card (when no interest is paid) even though the credit-card owner benefits from the borrower's purchase by earning mileage, etc.

It is forbidden to lend money on condition that the borrower will (at a later date) lend the lender money for a longer period of time or a larger amount of money than the present loan entails. It is debatable if the lender can make that type of condition if the amount of money and time will be the same as those of the present loan.

It is forbidden to charge extra money for a post-dated check, since the person issuing the check is actually paying interest for the privilege of delaying payment.

A form of ribbis of which many people are not aware is the case of two people agreeing to an uneven exchange of jobs or chores. For instance, a teacher should not say to a colleague, “I will teach your period if you will teach mine” if the two periods being exchanged are not exactly equal, both in the length of time and in the difficulty of work entailed. Similarly, one may not say to his friend, “I will paint your house if you will paint mine,” if the two houses are not exactly even in size and in the amount of work involved.

It is forbidden to tell someone, “Have a meal with me, since I ate at your house last week.” This appears to be payment of debt, and since one might give his friend a more elaborate meal than the meal he received, it may be perceived as ribbis. Some poskim, however, permit saying, “Come to my house for lunch, and I'll eat lunch at your house next week”, while other poskim prohibit this as well.

Note: It is important to remember that in some of the cases in which it is prohibited to charge interest, a Heter Iska (a partnership agreement) can be drawn up by a competent rabbinic authority which allows the transaction to be carried out in a halachically permissible manner.

The prohibition of ribbis is not limited to monetary payments. A favor or a benefit of any sort which the lender receives from the borrower may fall into the category of interest. There are several basic rules which govern the extent of this prohibition:

a. A borrower may not extend a favor to a lender just because he got a loan from him. If the borrower would not have done the favor otherwise, it is forbidden to do the favor.

b. The borrower may not do a favor for the lender in public even if he would have done the favor regardless of the loan.

c. When the relationship between a borrower and a lender is long established and the borrower has previously granted public favors to the lender, such a relationship may continue even after a loan takes place.

A borrower may not praise or bless a lender for lending him money or for extending a payment deadline. Some poskim even prohibit saying a simple thank-you, while others allow a simple thank-you.

A borrower may not buy a lender an aliyah in appreciation for a loan. A borrower may not send mishloach manos to a lender, tutor a lender or his child in the study of Torah without compensation, offer him charity, sell him goods or offer a service below market price, or buy goods from him or pay him for a service above market value, unless he would have done so regardless of the loan.

A borrower may invite a lender to a wedding even if he would not have invited him were it not for the loan.

Institutions, e.g., yeshivos, shuls, etc. may honor an individual who has loaned them money, provided that the honor was not a condition for granting the loan.

It is permitted for a borrower to give a wedding gift to the son or daughter of a lender, even if he would not have given a gift were it not for the loan. The gift must be an item which the groom's/bride's father would not normally purchase for his child.

A borrower may extend to a lender a common courtesy, such as changing money for him. A lender, though, may not (strongly) request a favor from a borrower, even if it is merely a common courtesy.

Note: All non-financial benefits and favors are prohibited only while a loan is outstanding. Once a loan is repaid, this type of ribbis prohibition no longer applies.

QUESTION: Although it is explicitly forbidden for an individual to charge or pay ribbis, does the prohibition of ribbis apply also to corporations? There is some misunderstanding regarding this halachah. A lenient ruling by Harav M. Feinstein holds that a corporation may pay ribbis for deposits, loans, or credits which it receives, even if the corporation is totally owned by Jews. The reason for the leniency is that a “borrower” is halachically defined as someone who has personal responsibility to pay a loan. When a bank or another corporation is the “borrower”, the loan is guaranteed by the company's assets, but not by any individual. Thus there are no Jewish “borrowers” and ribbis may be paid by the bank or the corporation.

This ruling of Harav Feinstein has been accepted by some poskim and rejected by others. Obviously, if possible, a proper Heter Iska should be made before drawing interest from a Jewish-owned bank. If it is difficult to do so, there are poskim who allow taking the interest, as per Harav Feinstein's ruling. [Note that a Heter Iska does not allow a Jewish-owned bank to offer free gifts to depositors if the gift is chosen and delivered at the time of deposit, since such gifts are a form of ribbis.]

Under no circumstances, however, is it permitted to borrow money from a Jewish-owned bank or corporation. Since the borrower is an individual who accepts personal responsibility to repay the loan, the above leniency does not apply.

Similarly, lending money to a Jewish-owned corporation with the personal guarantee of repayment by the owners would be prohibited even according to Harav Feinstein's lenient opinion.

For the above reason, it is prohibited to buy shares in a publicly traded bank which has a majority of Jewish owners and does not use a proper Heter Iska when borrowing money from Jews. A company in which most of the shareholders are not Jewish but the Jewish minority has significant enough holdings that their opinion carries weight in management decisions, is also considered a Jewish company according to the opinion of many poskim.

We have previously mentioned the concept of Heter Iska. While it be would be almost impossible to explain the logic behind this very complicated transaction, suffice it to say that Heter Iska is a tool--debated, revised, and perfected over many centuries-- with which a lender may lend money to a borrower and be halachically permitted to collect interest on the loan. It is a legal document which transforms the loan [or part of it] into an investment, with a remote chance of loss of principal to the lender. Since ribbis is only forbidden when a fully guaranteed loan takes place, this tool allows the lender to earn “profits” from his “investment” as opposed to “interest” from a “loan”, and it is therefore permitted. Heter Iska transactions are very common today and, when done under the auspices of an expert in these matters, are used in many business dealings in a permissible manner.

We must, however, point out an important reminder. According to the opinion of most poskim, including the foremost poskim of our generation, a Heter Iska is valid only if the money is being borrowed to invest in a business or in a property, or if the money being borrowed will free other money to be used for a business transaction. A person who borrows money to pay for his daughter's wedding, for instance, or for any other ongoing expenses, and does not have any profit-generating holdings or assets, may not use a Heter Iska to borrow money.

Many people are not aware of this limitation and are constantly borrowing money, or over-drafting their bank accounts from Jewish-owned banks, relying on a Heter Iska which is unacceptable according to most views. Certainly, one who is scrupulous and is generally not lax when it comes to other mitzvos of the Torah, should be aware that this transaction is not valid according to the majority opinion, and that it may be Biblically prohibited. When this situation arises, an expert Rav should be consulted, since there are methods that can be utilized in order to make this transaction valid according to most poskim.

QUESTION: Does the prohibition of ribbis apply to neighbors borrowing goods from each other? The prohibition of ribbis applies to goods borrowed between neighbors. A neighbor who borrows two challos may return only two challos to the lender. If a 5 lb. bag of sugar is borrowed, only that amount may be returned. There are, however, several notable exceptions to this prohibition:

If the difference between the item borrowed and the item returned is insignificant to the degree which people generally do not care about, the prohibition does not apply; a slightly bigger challah, therefore, may be returned.

When neighbors have a type of relationship where they are in the habit of borrowing from each other without being careful to return everything they borrow, then the prohibition of ribbis does not apply. This is because the neighbors are not “borrowing” from each other; they are giving each other gifts. [Note that many neighbors do not have such a relationship.]

When the borrower is uncertain of the precise amount he borrowed, he may return an amount which is great enough to assure that the loan is paid up.

A neighbor who borrows an item from his friend may return that item exactly as borrowed, even if the price of the item has gone up in the interval. This is permitted because prices tend to fluctuate by small amounts and neighbors generally are not particular about such a small difference.