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Chapter 66:1-3
Investment Contracts

[Though lending money at interest is forbidden, under certain conditions it is permissible to invest money in a business venture and receive a share of the profits. This arrangement is called a heter iska and is discussed in the following laws.]

1. When a person entrusts money to a colleague to invest in a business venture, with the stipulation that they will divide equally all profits and losses, this arrangement is referred to as an iska and is forbidden. The rationale is that half of the money is considered to be a loan to the recipient, since he is responsible for it. He derives profit from it and he incurs any losses suffered. The other half is considered to be a deposit, because the investor is responsible for it. He benefits from its profits and incurs the losses suffered. The recipient does business and troubles himself with the portion which is a deposit and belongs to the investor only because he has given him the other portion as a loan. Undertaking those efforts on the investor's behalf is considered interest, and hence the arrangement is forbidden.

Nevertheless, such an arrangement may be permitted if the investor pays the recipient a wage for the work and effort involved in doing business with his share. The wage should be stipulated or paid when the investment is made. Payment of even a nominal amount is sufficient to remove the prohibition.

2. The investor may stipulate that the recipient's word will not be accepted should he claim that the investment suffered a loss, unless he supports his statements with the testimony of trustworthy witnesses. Similarly, he may stipulate that his word will not be accepted regarding a profit made by the investment unless he supports it with an oath.

3. It is also possible to stipulate that the recipient will have the choice of giving the investor a specific amount instead of the latter's share of the profits, and thus any profits remaining will belong to the recipient.

This is proper, because most likely the recipient will not desire to take an oath and give the investor the share agreed upon. This is the basis of the heter iska, which is commonly used at present.

Even if the recipient knows that no profit was made - and even if he suffered a loss - he may pay the investor the principal and the amount of profit stipulated. No prohibition is being transgressed; since he is obliged to take an oath, he has the right to pay money to free himself from that obligation.

   Investment Contracts
Paragraphs 4-6
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Halacha-Yomi, Copyright (c) 2000 ProjectGenesis, Inc.

 

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