Iska

An iska (Hebrew for business or venture) is an arrangement in halacha, Jewish religious law, under which one party provides capital and another party trades or works with it, and the two share the outcome. In its classic Talmudic form the capital is treated as half loan and half deposit: the half that is a loan belongs to the manager, who bears its risk, while the half that is a deposit remains the property of the investor, who shares in its profit and loss. The structure allows capital to earn a return for the person who supplied it without that return being classified as forbidden interest.

The iska is the foundation for the much more widely used heter iska, a standardized contract that lets Jewish lenders, banks and businesses extend finance to other Jews within the prohibition on ribbit, the biblical and rabbinic ban on charging or paying interest between Jews.

The Torah forbids lending to a fellow Jew at interest, and rabbinic law extended the prohibition to many arrangements that resemble interest, known as avak ribbit, the dust of interest. A pure loan must therefore be repaid at its face amount. The ban creates the same practical problem faced in Islamic law under the prohibition of riba: how can someone with savings fund another person's business and be compensated for it? The answer in both traditions is to turn the creditor into a partner who shares risk. The iska is the Jewish counterpart of the Islamic mudarabah and, in some respects, of the musharakah.

The Babylonian Talmud, in tractate Bava Metzia, discusses the case of a person who gives money or goods to a merchant to trade with. The sages characterize the transfer as palga milveh u-palga pikadon, half loan and half deposit. The consequences follow from each half:

• The loan half becomes the manager's property. The manager keeps all profit on it and must repay it in full even if the venture loses money.
• The deposit half stays the investor's property, held by the manager in trust. Profits on it belong to the investor, and losses on it fall on the investor.

Because the manager works on the investor's deposit half, the investor would be receiving a benefit for which the manager is not paid. To avoid this looking like a reward for the loan, which would be ribbit, the manager must receive some payment for his labor. In practice this can be a small fee or an agreed adjustment of the profit split, often described in the sources as the wage of an idle worker.

An investor supplies 100,000 to a trader under an iska with an even profit split on the deposit half. The trader earns a profit of 20,000 on the full capital. On the loan half of 50,000 the trader keeps the 10,000 profit. On the deposit half the 10,000 profit is shared, with the trader receiving a stated fee for his work and the investor the rest. If instead the venture loses 20,000, the trader must still repay the 50,000 loan half in full, while the investor bears the 10,000 loss on the deposit half and receives back 40,000 of it.

Over centuries, rabbinic authorities adapted the iska so that investors could receive a predictable return. A widely used form, attributed to a rabbinical authority in Kraków in the late sixteenth century, became known as the heter iska, meaning the permission of iska. It adds clauses under which the manager is presumed to have earned at least a stated profit unless he proves otherwise by demanding evidence, such as testimony before a beit din or a solemn oath. Since most managers prefer to pay the stated return rather than meet that burden, the contract produces a result close to a fixed-rate loan while remaining, in legal form, an investment partnership.

Today many Israeli banks and Jewish-owned lenders elsewhere operate under a general heter iska, and individual contracts are often drafted or approved by a posek, a decisor of Jewish law.

Authorities have long debated how far the heter iska may go. Some decisors accept it for business finance but are reluctant to use it for consumer loans where the borrower has no profit-generating venture, arguing that the partnership is then a fiction. Others accept it broadly provided the documentation is honest and the funds could in principle be invested. A similar discussion takes place about other devices in Jewish law that soften economic prohibitions, such as the prozbul, which allows debts to survive the shmita year.

Communities also maintain interest-free lending through the gemach, a free-loan fund, for people in need, so that the iska is mainly a tool for commercial rather than charitable finance. Comparative studies of religious finance often place the iska alongside the Islamic finance structures described under Islamic finance.