Economic developments have led to an increasing need for the giving and receiving of loans, and for the providing of credit by various financial institutions. These institutions could not operate if they did not generate profits and they are an essential part a modern economy. Against this backdrop, various halakhic methods have been developed to enable a great number of transactions which, under normal circumstances, would be forbidden due to the various prohibitions of interest.

Below are several ways that the halakha has addressed the challenges posed by the prohibition of interest. There are other methods, but they are less accepted today.

Heter iska: This is a halakhic convention developed in order to structure business transactions in such a manner as to avoid violating the prohibition of interest. It is an agreement between the creditor and the debtor that turns all their loans into investment ventures. A loan covered by a heter iska is defined as partnership between the creditor and the debtor, in which they both share the profits of the transaction. The additional payment of the debtor, beyond the principal, is not defined as interest but rather as the distribution of profits.

Nowadays, all banks in Israel sign a heter iska, thereby enabling customers to borrow money from the bank without violating the prohibition of interest. It means that the additional repayment for a loan received from the bank is not interest, but rather a share in the profits of the transactions executed by the customer with the money the bank lent him. This agreement also applies to the reverse case, when the customer deposits his money in the bank and the bank gives him an additional amount to the principal at set intervals. This increment is not interest, but a distribution of the profits from the transactions performed by the bank over the course of this period with the customer’s money.

If a private individual wants to lend money to another with an agreement that he will repay more than the principal, they must first sign a heter iska, as otherwise the creditor and the debtor will violate the prohibition of interest.

Some halakhic authorities maintain that a heter iska is permitted only for business purposes, and it should not be used for day-to-day matters. This includes an overdraft in one’s bank account, for which the bank charges interest. These authorities claim that in order for a heter iska to be valid, there must actually be an investment whose profits can be divided between the creditor and the debtor. However, other halakhic authorities contend that it is permitted to use a heter iska regarding any loan and for any purpose, and it is generally accepted to rely on this lenient opinion.

Limited liability corporations: Some halakhic authorities have argued that a limited liability corporation is permitted to both borrow and lend with interest. Since the corporation has limited liability, i.e. that the shareholders are not responsible for the debts of the company if it goes bankrupt, the shareholders are not regarded as partners in the company. Rather, the company itself is an economic entity and the prohibition of interest applies to private individuals, not abstract entities. If this is the case, interest would be permitted in both loans from a bank and loans to a bank (savings). Nevertheless, almost no halakhic authorities are willing to rely upon this argument in practice and require that a bank or investment company (which sells bonds, which are essentially loans to a company) be a signatory to a heter iska.

Other authorities have argued that there is a difference between borrowing money with interest from a limited liability company and lending it money with interest (e.g. a savings account in a bank or a bond with a fixed return). In the former case, the debtor bears personal responsibility for the loan and therefore it is regarded as loan with interest, which is prohibited in the absence of a heter iska. However, when the corporation is the debtor (like when it issues a bond), since it has limited liability and no one has personal responsibility for the loan, there is no prohibition of interest. In any case, it is recommended that one ensure that there is a heter iska also in this case.

In any case in which uncertainty arises as to whether or not a loan might involve prohibited interest, it is recommended to consult a rabbi who has expertise in this field.