Last week we summarized the main points of a heter iska:
- The money given by the bank is an investment, not a loan.
- The lender is therefore entitled to the returns.
- The lender agrees to accept a set amount in lieu of varying returns; these are the “interest” payments.
- If the investment is not profitable, the borrower may swear to absolve himself from paying the settlement amount.
Let’s elaborate the first point.
We must internalize that the money is an investment, and it is still owned by the lender/investor. This has pros and cons for the investor. On one hand, if the investment does well the investor has profited, and conversely, if the investment fails the investor loses his capital. However, the lender’s money is relatively safe. The heter iska places the burden of proof on the borrower and requires him to prove with witnesses that the principle has been lost; otherwise, he must return what he has received, in addition to the profits if they have been earned.
Since the money is an investment, ideally the borrower should actually be investing the money. If one is borrowing to purchase a home, that’s a great investment for the lender/bank; owning real estate in Eretz Yisroel is profitable due to the consistent rise in prices. In addition, the home produces income in the form of rent collected from the tenants.
Even if the borrower will be living in the home and not renting it out, since the heter iska stipulates that the home belongs (at least partially) to the bank, the bank is eligible to receive rent. Consequently, the “interest” paid is a mix of the rent and profit reflecting the rising prices. The home will not belong to the bank permanently, because in addition to returning the profits, the monthly payout also serves to repay the principle, and in the case of a home, allows the homeowner to buy the home back.
If the borrower is not using the money for an investment, perhaps to make a simcha or to pay off debt, we have a problem. How can the borrower return more than he borrowed? In this case, how can we see the money given as an investment when the borrower just spends it and there are no possible profits? In the coming weeks we will discover if and how this works.
