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What Was the Original Heter Iska?

Rav Yosef Dovid Josilowsky, Dayan at the Bais HaVaad

Case: Reuven is giving a hard money loan to a Jewish lender and knows that he needs a heter iska. He found a shtar online that says, “This investment is subject to the heter iska outlined by Rav Mendel, as detailed in Sefer Nachalas Shiva, Chapter 40.”   

Question: Can he use this document as his heter iska

Answer: It is very important for someone using a heter iska to understand what the heter does and how it works in order to be able to know if it is applicable to his particular circumstances. 

Rav Mendel’s version of heter iska was used for many years. The way it worked was that the investor gave the money as a full investment until it reached a certain amount of profit, at which point it reverted into being a loan. For example, the investor gives his partner $100, with the agreement that the partner works for him until the money invested reaches a value of $200. At that point, it would convert to a loan that the partner has to pay back in full, with no more interest being charged on the $200. 

The Vilna Gaon and others had a problem with this framework, which is why it is not widely used today. They note that after the investment reaches $200, the borrower is still working for the business. If he still has to repay the money, which is now a loan, it turns out that he is working for free. In many cases, this may be a problem of ribbis. 

Today, one common practice is for the heter iska to be written in a way that all the money is given completely in the form of an investment, and it remains an investment without ever reverting to being a loan. In order to lessen the investor’s liability, a clause that requires the partner to swear about any losses is put into the heter iska. 

Since every case is different and there can be many variables, it is important to make sure that the heter iska is written correctly for that particular transaction and all sides understand how the heter is arranged.   

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