Question
About five years ago I lent a friend fifty thousand dollars. We copied a heter isska from a sefer on ribbis and the terms were that he was receiving the money for one year at six percent. At the end of the year his situation was still the same and he didn't pay up the loan. Since I was aware of his situation, I didn't pester him to pay and didn't say anything about paying, since the Torah says one should not bother a borrower to pay if he doesn't have money. Finally, after about five years, his situation improved and he wants to pay what he owes. I reminded him that according to the isska agreement that we made he has to add 6% a year. He claims that we only made the agreement for one year and for the subsequent years he does not owe 6% because for that period of time, the loan was an interest-free loan since one may not charge interest for a loan if one does not have a heter isska. Who is right?
Answer
Your friend's argument shows that he, like many others, lacks a basic understanding of the meaning of the concept of a "loan with a heter isska". It is extremely important for people who use a heter isska to understand the meaning of this concept and, according to many, it is critical. Therefore, we will first explain the terms of a heter isska.
As you know, the Torah forbids lending and borrowing with interest. Almost five hundred years ago, some Jews in Eastern Europe opened businesses and needed capital in order to develop their business. Since they were not poor people who needed funds to cover their basic needs but people who needed the funds in order to earn more money, there was a need for a vehicle to enable lenders to share in the profits of the borrowers with minimal risk of suffering a loss of principal and high probability that they would earn a certain percentage profit.
The method that was suggested by Rav Mendel (called the Maharam in isska documents) and perfected by later Gedolim including the Levush and Sema, was that the one who supplies funds does not lend the money to the one who needs the funds but rather gives the money as an investment, known as an isska. The concept of isska is already discussed by the Gemara at length. The Gemara (BM 104B) writes: "This isska is a half loan and half deposit (pikodon). The Rabbonon instituted a vehicle that is pleasing to lenders and borrowers alike." The Mishnayos and Gemaras in this perek of BM (perek 9) discuss the laws of this vehicle at length.
The reason this vehicle is pleasant to both borrowers and lenders is that while one who extends a loan may not earn money from the loan due to the laws of ribbis, he is allowed to earn money from a deposit. In fact, since the deposit belongs to the one who gave the money (whom we will henceforth call the investor), he is entitled to all of the profits from this deposit. By contrast, all of the profits from the half that is a loan belong to the recipient. Therefore, they have an equal share in the total profits from these funds, meaning that inherently each deserves half of the profits.
Thus, when one "extends a loan under the terms of an isska agreement" he is investing money in the prescribed manner of the Gemara and not lending money. The Maharam and subsequent gedoloim added secondary terms to enhance the security of the funds and to guarantee as much as possible that the investor will earn his expected profit, while remaining within the framework of the isska.
What is very important and, according to many poskim critical, to bear in mind is that the one who extended the funds is not a simple lender and the one who received the money is not a simple borrower because if they were, the investor would not be allowed to earn a penny. The Chafetz Chaim (Ahavas Chessed, 2, 15) vehemently criticizes people who give all their available capital to someone who borrows money from them with a heter isska. His writes that one does not fulfill the mitzva to lend money to a Jew who is in need by extending this type of a loan, since the money is invested and not lent to the needy as the Torah enjoins us to do. In fact, as we wrote above, that was the original purpose of the heter isska: to enable Jews to invest their money in a manner that conforms with Torah law. Thus, one may use some of his ma'aseir money to extend interest free loans either directly or via a gemach, but one may not use any ma'aseir money to extend loans with a heter isska.
Based on the above, there is absolutely no basis for your friend's contention that after the first year all the funds that you gave him became an interest-free loan. Half of the money was always a deposit from which he had to give you all of the profits since the money was yours and not his. You never lent him that money. It remained your money.
It is extremely important that you and the person you give money to, understand that you did not extend a loan but invested the money as an isska. This was already stressed by the Sema (Abridged 4) in his guidelines to ribbis and afterwards by tens of poskim, including the Iggros Moshe, and is not controversial. The only controversy is whether bedi'eved, after the fact, the heter isska is valid without this understanding. Among the poskim who rule that it is totally invalid are the Rav Shulchan Aruch (Ribbis 46) and the Tzamach Tsedek.
In your case, since it is not 100% certain from your argument that you both don't understand what you did plus most poskim (see Divrei Sofrim pages 342-344) maintain that bedi'eved the heter isska is valid, therefore, you can rely on your heter isska.
In order to answer your question, it is important to explain further how a heter isska functions. When you and your friend agreed that he would pay you six percent on the money you gave him, you really gave him fifty thousand dollars to invest as an isska which means that he was supposed to invest all the money and split the profits with you equally. No one knows in advance how much profit the investments that he makes under the isska agreement will yield. Since your friend was given money to invest on your behalf, you can force him to take an oath on a sefer Torah, or prove otherwise, that the money that he claims were the profits is accurate. (This is a shevuas hashutfim. It is discussed in CM 93.) Every isska agreement states that you both agree that in lieu of proving his claim, your friend can give you a certain amount known as the sechum peshara (compromise amount). In your case this was six percent for one year.
Now that we understand the mechanics of a heter isska, we can interpret your counterparty's argument in halachic terms. He claims that when the year was up, he no longer treated your money as an isska, i.e., that he was he investing your money for you, but used all of your money – principal as well as your six percent gain – as a loan, from which he was entitled to all of the profits. Thus, now he just needs to return your original principal plus six percent.
We have learned that your friend's claim is not true. Money that was given as an isska does not become a total loan at any point.
We must now study the halachic standing of an isska agreement after the date that it was set to terminate. The reason this is an issue is because your agreement did not take into account this possibility. We note that many isska documents, like the one written by the Chochmas Odom, take this possibility into account.
The Taz (177, 14) proves from the SA that the money remains an isska with the same terms as the original isska agreement. His ruling is authoritative. Among others who agree is the Maharam Alshich (res. 117) who preceded the Taz. Thus, what your friend says he did was to take all the money, which was still really an isska and belonged half to you, and used it all for himself.
This situation is discussed by the SA (CM 183, 3). He rules that the profits earned by one who used another person's money with the intention of keeping the profits for himself, belong to the halachic owner of the money. Therefore, even though your friend intended to keep all of the profits for himself, nevertheless, he must give you the profits on the part of the money that was yours.
Since your isska agreement was that, actual profits notwithstanding, you agreed that you would accept six percent per year as the profit, and since the isska agreement is still valid halachically, that is what you are entitled to. This is also the majority opinion (See Toras Ribbis 15, 37 and footnotes) of the poskim who discuss this sheilo from the standpoint of the ribbis prohibition.
In conclusion: You are correct. You are entitled to six percent per year of your fifty thousand with the six percent compounded annually.
