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.
