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Lending to Non-Jews with Interest

The question as to the permissibility of lending with interest to people who are not part of the Jewish community is debated in the Talmud (Bava Metzia 70b-71a). The Talmud's discussion is inconclusive, and the post-Talmudic rabbis take up the question. Moses Maimonides,[1] in his great Jewish legal code (Laws of Loans, Chapter 5, Law 2), rules that it is permissible for a Jew to charge interest to a non-Jew only when there is a dire need and in the amount necessary to provide himself with a basic living. To charge a usurious (higher-than-normal) rate is prohibited. The great rabbis of medieval France and Germany were somewhat more permissive under circumstances in which Jews were barred from most professions, and Jewish communities were singled out for taxation above the ordinary rates (commentary of Tosafot to Bava Metzia 70b).

Business Financing

In the sixteenth century, as life became much less agrarian and much more commercial, loans were no longer primarily extended for personal reasons, but rather to provide commercial capital. As these kinds of loans were vital for commercial success through business expansion and were not the kinds of loans first envisioned by the Torah, efforts were made to find a permissible vehicle for this kind of enterprise.

Rabbis in Poland and subsequently in other parts of Eastern Europe drafted and refined a document called heter iska (this is similar in structure to the Musharaka [Joint Venture] RF structure used in RF banking, as will be discussed later.) The essence of this document is to transform the lender-borrower relationship into an investment relationship. The provider of the capital becomes a partner in the venture in which the borrower will be engaging; the borrower will share a specified percentage of the realized profits with the lender/investor. This technical redefinition of the loan as an investment allowed Jewish commercial enterprises to succeed without violating the laws of prohibiting the charging of interest. The heter iska was refined several times to help ensure that the lender/investor would not be exposing himself to an unacceptable level of risk and that some measure of return would be contractually guaranteed. The heter iska is in common use to this day.

  • [1] Moses Maimonides (born in Cordoba, Spain, in 1135 and died in Fustat [old Cairo], Egypt, 1204) was a great Jewish scholar, philosopher, and medical doctor who lived in Egypt and was one of the most prominent in the court of Saladin (born in Iraq and died in Damascus in 1193).
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