In this week’s article, we examine the heter iska: what it is, how it functions, and how it avoids the prohibition of ribbis.
What exactly is the Torah’s prohibition against charging or paying interest? Is it ever permissible to extend an interest-bearing loan, or does that always constitute a serious violation? How do observant Jews interact with the modern financial systems -- opening accounts at Jewish-owned banks, taking interest-bearing loans, depositing funds, or entering transactions that appear to involve interest?
Does every investment fall under the prohibition of ribbis, or are there legitimate distinctions between a loan and an investment? How can one differentiate, in precise financial and halachic terms, between a prohibited interest-bearing loan and a permissible profit-generating investment? Are there recognized legal structures that render such transactions permissible from the outset?
We will also explore the heter iska as formulated by Chazal in the Mishnah, and trace its development and refinement over the generations. Does the heter iska involve any practical or legal risks? What is the framed document commonly displayed in banks, signed by rabbonim and financial executives? What does the clause “all is in accordance with the enactment of the Maharam” that appears on many old contracts mean? Can we rely on this formulation today?
These and other related questions will be addressed in the following article.
What Is a “Heter Iska”?
Most of us are closely familiar with the document known as a heter iska. When one Jew wishes to lend money to another Jew with interest, he signs a heter iska. Nearly all banks and most major companies in Israel operate under such an agreement, meaning that any transaction conducted with them is subject to this stipulation. In the following article we will examine what a heter iska is, and how it works.
Ribbis
In this week’s parasha (Vayikra 25:35 – 38) the Torah commands us to support any Jew in need. If this support takes the form of a loan, the Torah warns us that it is forbidden to charge interest: “If your brother becomes impoverished and his means falter... you shall support him… Do not take from him interest... and you shall fear your G-d, and your brother shall live with you. You shall not give him your money with interest... I am Hashem your G-d…”
The Torah reiterates this prohibition in several other places. In Parashas Mishpotim (Shemos 22:24): “If you lend money to My people, to the poor person with you, do not act toward him as a creditor; do not impose interest upon him.” In Parashas Ki Teitzei (Devarim 23:20): “You shall not give interest to your brother, [whether it be] interest on money, interest on food or interest on any [other] item for which interest is…” In Parashas Re’eh (Devarim 15:8): “You shall surely open your hand to him and lend him sufficient for his needs…”
The Yechezkel Hanavi further elaborates on the reward for one who avoids interest and the severe consequences for one who takes it: “He does not give with interest nor take increase… he is righteous; he shall surely live… But one who gives with interest and takes increase… he shall not live…”. Also Shlomo HaMelech warns (Mishlei 28:8): “One who increases his wealth through interest and gain gathers it for one who is gracious to the poor.”
The prohibition applies to everyone involved in the loan: the borrower, the lender, the guarantor, even the scribe who writes the contract and the witnesses who sign it. The prohibition of ribbis is among the most severe in the Torah. As we learn from the words of Yechezkeil Hanavi, one who is careful in this matter merits eternal life and Techiyas Hameisim, whereas one who, Heaven forbid, violates it, will not, G-d forbid, rise with the final Resurrection of the Dead.
Depositing Money or Taking a Loan from a Jewish Bank
The severity of this prohibition leads to an obvious question: how do observant Jews function within the modern financial system? How can one open an account in a Jewish-owned bank, take a loan that includes interest, deposit funds, or enter into financial agreements with other Jews, when such arrangements seem to involve ribbis? As we will see, many standard financial contracts today contain elements that could raise ribbis concerns.
There are, in fact, several well-established methods to address this issue. In this series we will explore a number of halachically sound frameworks that allow business transactions to be carried out properly.
At the same time, shrugging halachic concerns off with “I didn’t know” or “this is just how things are done” will usually lead to unintended violations. Unfortunately, it is not uncommon for individuals to discover, post facto, that they have been involved in a serious prohibition without realizing or intending it. This makes learning about it and raising awareness of this prohibition it all the more important.
In the following article we will focus on one of the most common solutions: a properly structured, mehudar, heter iska.
Almost every bank in Israel has a heter iska in place. Many branches, especially those located in religious neighborhoods have a framed copy prominently displayed. Recent years has seen growing awareness of issur ribbis also in financial institutions abroad, particularly those wholly or partially owned by Jews.
Given that this has become the standard and recommended approach for structuring financial dealings between Jews today, it is worth taking the time to understand what a heter iska is and how it is meant to be applied in practice.
I would also like to acknowledge, with appreciation, the assistance of my brother, Rabbi Yechezkel Storch, who heads the heter iska division at the Beit Hora’ah for matters of ribbis, Bris Pinchas, under the guidance of Rabbi Pinchas Wind.
The Prohibition of Ribbis
The Torah prohibits charging interest from a Jew. At the same time, it places a positive obligation on anyone with surplus funds to extend interest-free loans to those in need.
Many people fulfill this mitzvah by placing their money in a gemach (a free-loan fund) and meriting the blessing promised by the Torah: “Because of this matter, Hashem your G-d will bless you in all your endeavors and in all that you undertake.”
The prohibition applies specifically to loans. However, when one invests money in a business, there is no prohibition against reaping profits from that business.
This leads to the question: what is the difference between a loan and an investment? When does halacha consider a transaction a loan, and when is it considered a deposit or investment?
The short answer is that it depends on whether the recipient bears full responsibility for the funds or not. But this requires explanation.
A Loan vs. A Pikadon
A loan is when the lender gives money to the borrower, whether for a specific purpose or for general use, and the borrower is responsible to repay the full amount, even if he lost it through no fault of his own.
When returning this kind of loan, we must be careful of the prohibition of ribbis. The borrower may not return even the smallest additional amount beyond what he received. If he borrowed $100 he is forbidden to repay even a single penny more than $100, even if he invested the money and now has $1000.
An investment pikadon, or deposit, on the other hand, is essentially a partnership where one person gives their money to another to invest on their behalf. This can be a general partnership, where the manager chooses what to invest in, or it can be a partnership for a specific investment, like buying a certain piece of property. Here, the borrower must return the original amount plus any profits that the money earned.
To make it fair, both parties can agree ahead of time on a payment for the person doing the work (the manager). This is usually called a management fee. The management fee might be a percentage -- for example, 2 cents for every dollar; a fixed amount, or profit sharing -- for example splitting the profits 50/50.
In this type of setup, if the investment loses money or fails completely, the manager does not have to repay the investor out of his own pocket. The investor is the one who suffers the loss.
Contemporary Loans and Pikdonos
Depositing money in a regular checking account is actually lending money to the bank, because the bank promises to repay the original amount, plus a set amount of interest. This promise holds true regardless of how the bank actually uses the money, and if it made profit or not.
On the other hand, depositing money in an investment fund is considered a pikadon, because the company invests the money in agreed-upon investment tracks. In return, the company charges a set management fee. In this case, if the investment succeeds — for example, if a stock increases fivefold — the investor receives a corresponding return. However, if the chosen investment collapses and becomes worthless, the investor gets nothing, even if the investment house had an overall successful year.
The above is just a basic outline. Practically, most investments also include an element of a loan. Therefore, it is extremely important to only invest in a Jewish-owned fund that has a valid and carefully structured heter iska in place.
The Chachomim’s Enactment
The Chachomim in the Mishnah pioneered an investment model designed to balance two competing goals: generating growth and protecting principal. They established that an investment should ideally be structured as a hybrid, with half treated as a secure loan and the other half as an investment deposit. This approach addresses a timeless challenge in finance, as most people want their wealth to grow but are understandably hesitant to expose their entire principal to high-risk ventures. In the era of the Mishnah, this was managed through direct partnerships: a wealthy individual provided the capital, an enterprising partner provided the labor and expertise, and both parties split the profits according to their agreement.
To mitigate the risk of a total loss for the investor, Chazal instituted a framework that divides the capital into two distinct legal categories. The first half is classified as a debt component, or a loan, for which the manager is personally responsible. This ensures that even if the business fails, this portion must be repaid in full, keeping half of the investor's money safe. The remaining fifty percent is treated as an equity component, known as a pikadon. The investor retains the rights to the potential upside and profits from this half, while the manager receives a fee for his professional services.
Today’s investment funds follow the same model, balancing high-risk startups with steady bonds and safe-haven assets like gold. This framework blends security with opportunity. Ultimately, this balanced structure created the legal and financial foundation for the heter iska arrangements used today.
The First Heter Iska
Over the generations, Chazal and later authorities refined and adapted this structure to changing economic realities. The original model from the Mishna works well when profits depend directly on the success of the investment and the effort invested. However, as time passed, a need arose for arrangements that would allow for fixed and predictable returns.
The Maharam of Rothenburg (1215–1293) introduced the first formal heter iska to address this need. His formulation was codified in the Shulchan Aruch (YD 167:1) and became widely accepted. For generations, Jewish contracts commonly included the phrase: “All is in accordance with the enactment of the Maharam” -- indicating that the agreement follows his heter iska framework.
According to this model, the arrangement alternates between phases: At first, the funds are treated as a pikadon, and all profits and losses belong to the investor, until the investment doubles. At that point, it converts into a loan, and from then on, profits and losses belong to the recipient of the funds, until the amount doubles again. This cycle can continue repeatedly.
Halachically, if no explicit agreement is made, the investor must compensate the recipient for his work during the “deposit phase” through management fees. However, if the parties stipulate even a minimal fixed payment in advance, that suffices.
Today, it is generally not advisable to rely solely on the original enactment, nor is it sufficient to simply append the phrase, “all is in accordance with the enactment of the Maharam,” at the end of a contract. Why? Consider the following example:
A man once received a substantial inheritance, which he carefully set aside for his children’s future weddings. In the meantime, a successful entrepreneur approached him with an opportunity: invest the money in a new venture and earn high returns. It sounded promising, but the investor hesitated, concerned about the prohibition of ribbis, and suggested arranging the deal through a proper heter iska.
The entrepreneur brushed it off. “There’s no need,” he said. “In all my contracts I just add the line: ‘everything is in accordance with the enactment of the Maharam.’”
Relying on that assurance, the investor went ahead and handed over the funds. Unfortunately, the business failed. At the same time, the entrepreneur himself still held other profitable assets. The investor therefore demanded repayment from those holdings.
The entrepreneur refused. “We agreed that everything follows the enactment of the Maharam,” he replied. Since the loss occurred at an early stage, before the investment had doubled — the entire sum at that point was a pikadon. That meant the loss fell entirely on the investor.
The case was brought before a beis din, and only then did the investor fully realize what he had agreed to. It was too late, and he lost the entire amount.
The Burden of Proof
The Terumas HaDeshen (1390–1460), added a crucial condition to the heter iska: when the recipient of funds claims a loss, or that profits were lower than expected, he must substantiate his claim.
Accordingly, the contract can stipulate in advance that the investor has two options: Either to provide specific proof, as defined in the agreement, or to forgo proof and instead pay the principal plus a predetermined profit amount, thereby exempting himself from the need to prove his claim.
The Terumas HaDeshen even suggested that the contract require the investor to produce valid witnesses for every expense incurred — specifying, for example, that only prominent community figures such as the rabbi and the cantor would be accepted as witnesses.
Since, in practice, it is unlikely that the investor would conduct all transactions in their presence, producing such testimony would be extremely difficult. The author himself acknowledged that this could appear to the public as making a mockery of halachah, and he wrestled with whether it was appropriate. Nevertheless, he ultimately permitted it, invoking the principle: “the righteous will walk in it, while sinners will stumble through it.”
Today, such impractical conditions, like requiring only specific individuals as witnesses for expenses, are not used. However, this idea laid the groundwork for the structure of the modern heter iska.
Loss From Heter Iska
Before continuing, it is worth considering two actual cases in which the borrower attempted to invoke the proof of investment in the heter iska to avoid repayment.
In 1986, following a major stock market crash in Israel, many investors suffered heavy losses. One such case involved a client of Bank of North America. The bank had encouraged him to take a loan and invest the funds in its own investment program, assuring him that the returns would exceed the interest he would owe. For a long time, the arrangement appeared successful: the client received steady profits with little effort.
After the crash, however, the investment was wiped out, leaving him with a substantial debt to the bank. He argued that the entire structure had been set up as a heter iska. The funds, he claimed, were a pikadon, and he had fulfilled his responsibility by investing them exactly as stipulated — through the bank itself. Under such an arrangement, he argued, he had two options: either to prove proper investment, or to pay the agreed return. In this case, proof was straightforward — the money had indeed been invested as required.
If the bank had acted responsibly and the loss resulted from factors beyond its control, then he had met his obligation and should not bear the loss. If, on the other hand, the bank had mismanaged the funds, then it was liable for the loss, which should offset his debt. Either way, he argued, there was no basis to demand further payment from him.
The case was brought before the Tel Aviv Beis Din, where the dayanim carefully examined whether such a claim could be upheld under those circumstances.
A similar argument arose in another well-known case involving the development of the city of Immanuel. The company responsible for construction went bankrupt, leaving many buyers with mortgages but no apartments. In 1995, one such buyer informed the bank that he would stop making payments. He argued that under the heter iska, if he could demonstrate that the funds had been used exactly as intended, and subsequently lost — he should be exempt. Since the loan had been issued specifically to purchase that apartment, and he could clearly prove that he had done so, he claimed he had fulfilled his obligation.
How were these cases ultimately decided, and what changes were later introduced to standard heter iska agreements as a result will be discussed in our follow-up article next week, be’ezras Hashem.
