The Prohibition of Charging Interest

 

The Torah forbids charging interest on loans between Jews.  At the beginning of our chapter, Rav Ganzfried points out the gravity of this prohibition, which is mentioned several times in the Torah (Shemot 22:24, Vayikra 25:36, Devarim 23:20-12), and which applies not only to the lender but also to the borrower, guarantors, scribe, and legal witnesses. Rav Ganzfried explains that the Torah and the Sages had to be especially strict regarding this prohibition because the participants do not perceive anything wrong with charging interest.  On the contrary, the loan is considered a benefit to all concerned.

 

Why does the fact that a loan is beneficial create a special temptation?  The Torah prohibits many things that seem perfectly innocent.  There is no obvious reason for the forbidden foods, but the Torah and Sages did not fear that Jews would make light of these prohibitions.  We readily accept that the reasons for "religious" or ritual prohibitions.  On the other hand, we generally assume that the Torah restricts our SOCIAL behavior - interaction between a man and his fellow - only when moral or ethical reason demands it. 

 

Where is the moral or ethical deficiency in usury?  We clearly perceive how society is damaged by adultery, stealing, and overcharging.  But for hundreds of years civil society has accepted that the economy benefits from the credit market - the market for loans at interest.  What, then, does the Torah find wrong with charging interest?

 

A loan is not like other business deals, in which the two sides enter the transaction as equals.  In a sale, each side has something the other needs - the buyer needs the seller's merchandise, and the seller needs the buyer's money.  But in a loan, the lender is a "have" and the borrower a "have not."  Of course, both sides anticipate that in the future the borrower's fortunes will improve, but until the time the loan is due, there is a marked asymmetry between the status of borrower and lender. 

 

The borrower is in a subordinate position from every point of view: he is economically inferior, personally beholden, and legally subjugated to the lender  (The lender is subject to a "shiabud ha-guf," meaning that his person is "likened" to the loan).  In fact, the Scriptures (Mishlei 22:7) liken the status of a borrower to that of a slave: "The rich man rules over the poor, and the borrower is the slave of the lender".  (This approach is reflected in "Ein Ayah" on Sheviit chapter 10 and Rav Nachman of Breslav’s "Likutei Halakhot" on laws of ribit).

 

Of course, the relationship between master and slave is one that is often voluntary and mutually beneficial, but the affront to human dignity is keenly felt.  All modern, civil societies prohibits slavery even through mutual agreement, and Torah law severely discourages servitude, though it does not forbid it.  At the end of the same Torah chapter we just cited, Hashem tells us, "For the children of Israel are slaves to Me" (Vayikra 25:55).  Our Sages inferred "They are slaves to Me - and not slaves to slaves (i.e. to other human beings) (Kiddushin 22b).  The Talmud employs this very inference to disallow employment agreements which are excessively subjugating (Bava Metzia 10a).

 

It is true that even without charging interest, the borrower is in a subordinate position.  This is an unavoidable corollary of his neediness.  The Torah recognizes that lending may sometimes be necessary, just as it recognizes that servitude may sometimes be necessary.  However, two regulations safeguard the dignity of the destitute.  A Jewish SLAVE is released AFTER six years of work, and DURING those six years may be worked but not exploited or degraded.  A Jewish BORROWER’S loan is forgiven AFTER the six years of the Shemitta cycle are through, irrespective of when the loan was made (see chapter 180), and DURING the time of the loan no interest may be charged.  This parallelism is highlighted by the fact that the prohibition on charging interest and that on degrading a slave are in consecutive Scriptural verses  (Vayikra 25:35-39).

 

Viewing a loan at interest as a kind of slavery can help us understand some specific details of the interest prohibition.  For instance, one of the most perplexing aspects of the interest prohibition is that it applies to the borrower.  Many ancient legal systems frowned on usury, but the reason was that they viewed it as an unjust charge, similar to overcharging.  It follows that these prohibitions did not apply to the borrower, just as no law forbids the victim from being cheated. 

 

However, in regard  to servitude, the Torah's disapproval is focused specifically on the slave.  When a slave decides to stay with his master beyond the legally required period, the Torah requires that his ear be pierced (Shemot 21:6). The Talmud explains why this particular appendage was chosen: "This ear heard My voice on Mount Sinai, when I said 'The children of Israel are slaves to Me' - and not slaves to slaves, and then this [man] went and acquired a master for himself?  Let [his ear] be pierced" (Kiddushin 22b).  Each Jew is responsible for maintaining his own freedom and dignity.  If we liken usury to servitude, then by extension we see why the prohibition applies to the borrower as well as to the lender.

 

This approach can also explain why interest is permitted with a non-Jew (se'ifim 24-29).  If interest were considered a kind of stealing then there would be no leniency with regard to Gentiles, for we are certainly not allowed to steal from them or cheat them in business  (See chapter 63).  But the requirement of maintaining a special dignity in business relations, however, is limited to transactions between Jews, as we explained in chapter 62.

 

Finally, this approach can help us understand an interesting loophole in the prohibition.  It is naturally forbidden for Reuven to accept a $900 loan from Shimon and in return give an IOU for $1,000.  The $100 by which the IOU exceeds the loan is interest.  But in se'if 14, Rav Ganzfied explains that Reuven may sell Levi’s $1000 IOU for $900.  And in se'if 15, he explains how this loophole may be exploited to create a loan at interest.  Why is this permissible?

 

When Reuven writes an IOU for $1,000, he is creating a personal obligation, that is, a kind of miniature slavery, between himself and the lender Shimon.  Thus, it is forbidden for Shimon to exploit this relationship and extort interest.  However, Levi's IOU previously exists in a permissible, non-exploitative way.  Since no quasi-servitude is created between any of the parties involved, the three-way transaction is permitted, even though it mimics a regular interest-bearing loan.

 

CHAPTER 66 - LAWS OF SILENT PARTNERSHIPS AND THE "PARTNERSHIP LENIENCY" FOR LOANS

 

In this chapter, Rav Ganzfried explains how a business partnership can be used as a "front" for a business loan, enabling interest to be collected on such a loan.  This expedient, known as a "heter iska" or "partnership leniency," is widely used in Jewish law since the time of the early Acharonim (middle 16th century CE).  Variations on the "heter iska" can be used to permit commercial credit among Jews, and in many cases, consumer credit as well.

 

The heart of this legal contrivance is to make half of the intended loan an actual business investment.  Therefore, borrower and lender are equal partners in the business, whether there is profit or loss.  However, the conditions of the agreement make verification of losses or low profits particularly burdensome (see the sample agreement in se'if 6).  The borrower can free himself of this verification requirement by making a compromise payment, which serves the function of interest.

 

At first it seems strange that only a few pages after admonishing us regarding the severity of the interest prohibition, Rav Ganzfried is himself providing us with a flexible way of circumventing this prohibition.  However, we can easily understand the acceptability of the "heter iska" in light of the explanation of the interest prohibition that we provided last chapter,

 

In chapter 65, we explained that lending at interest is problematic because of the subservience of borrower to lender, in which he is economically inferior, personally beholden, and legally subjugated.  However, in the "heter iska" an elaborate agreement is made testifying to the fact that the two sides are PARTNERS, that is, equals.  This representation of the relative status of the two sides has great symbolic importance.  In addition, the details of the agreement guarantee that the borrower can, if he wishes, maintain the relationship as a true business partnership.

 

Since the formal status of the relationship is one of equality, and since the borrower is himself empowered to control any deviation from this status (by agreeing to pay a compromise payment instead of providing evidence of his profits or losses), there is no reason to view the borrower as subservient to the lender.  So it is understandable that the heter iska agreement, in addition to solving the technical problems of circumventing the interest prohibition, was also considered a socially acceptable innovation in the world of business halakha.