IN-DEPTH FEATURES
Pitfalls of Interest in Modern Financial Markets

In recent weeks the Tel Aviv Stock Exchange average has been gathering momentum and has passed one thousand points for the first time, generating much enthusiasm. A word or two of caution concerning the Torah's prohibition of lending on interest is in order however for those contemplating getting involved or who are already involved.

I spoke to HaRav Aryeh Dvir, head of the Institute for Economics According to Halochoh which is affiliated with the Beis Hamedrash for Halochoh in Settlements, about some of the potential dangers that face the observant investor. "Many fine, upright people are unaware that they are lending their money on interest," Rav Dvir warns sadly. He is currently making great efforts to minimize the many danger spots in this area.

Over ten years ago the Torah community in Eretz Yisroel was in turmoil over the questionable validity of the heterei iska that the Israeli banks were using. The heter iska avoids a situation where prohibited interest is being either charged or received by stipulating that an investment is half-loan and half-deposit (iska). While the lender may not receive any return on the loan (which would be interest), he is entitled to profits earned by his deposit and furthermore, he can demand that the borrower take an oath that no profits are being withheld. The heter allows the borrower to pay a certain predetermined percentage in lieu of swearing this oath. Obviously, for the heter to work it must be binding on both parties.

The commotion was precipitated by HaRav Eliashiv stating his opinion that so long as the directors of the banks did not sign a legally binding document to the effect that heterei iska were an integral part of their contractual arrangements with their customers and that they were legally bound by their terms, the heteirim had no validity.

HaRav Eliashiv expressed a similar opinion with regard to the standard forms used in the sale of chometz prior to Pesach, which is a similar legal transaction. He ruled that a seller who does not observe mitzvos is not fully committed to upholding the transaction unless the document is legally binding. Forms were thereupon altered to obligate the parties legally as well as halachically.

At the time, this author revealed an official communication issued by the Bank of Israel at the request of one of the banks. This document confirmed the worst fears, saying that, "The banks' heter iska serves to assure the customers that the bank's transactions conform to the spirit of the halochoh. [However,] as far as the general law of the land is concerned no customer or bank can enforce any rights or entitlements arising from it, upon the Bank of Israel." This left it quite clear that the iska agreements between the various banks and their customers were devoid of validity.

In response to inquiries, the Bank of Israel deferred to a High Court decision in 1986 which ruled that heter iska is valid. In practice however, following a case where they were sued for losses on the deposit part of the investment, several banks refused to recognize the heter as legally binding. They merely acknowledged it as a document of `religious value.' This led to HaRav Eliashiv's ruling that heter iska agreements with the banks cannot be relied upon in the absence of a declaration by the management that they regard them as legally binding.

At HaRav Eliashiv's request, his emissary HaRav Yosef Efrati set up the Institute for Economics According to Halochoh, headed by HaRav Aryeh Dvir, to act as a framework within which such issues could be dealt with. Rav Dvir then held a series of meting with the directors of the different banks in order to hear their views and to explain the workings of the heter iska. After consulting HaRav Eliashiv and holding negotiations, several alterations were made in the standard form of the iska, reassuring the banks' directors and enabling them to give the desired confirmation that the agreement is legally binding.

Q. When did the practice of making a general heter iska originate?

Rav Dvir: The heter iska entered into with the banks is indeed a general one, meaning that it takes effect automatically, without requiring the explicit consent of the parties. The idea was first suggested by Rav Ezriel Eiger zt'l, a great grandson of Rabbi Akiva Eiger zt'l, as a measure that would benefit the public. Everyone would make a heter iska and declare on erev Rosh Hashanah that all transactions in the coming year would be subject to its terms. The precedent for such an arrangement is the Shulchan Oruch's ruling (Yoreh Dei'ah 311:2, according to the first view) that one can make such a condition to annul in advance any vows one makes. (However, the condition only takes effect if one forgot about it and made a vow inadvertently and if the same would be true of an iska made in advance.) This is similar to the preconditions that we make after hatoras nedorim on erev Rosh Hashonoh.

HaRav Isser Zalman Meltzer zt'l, HaRav Aharon Kotler zt'l, and other gedolei Yisroel took issue with this approach. They argued that a prior declaration is effective for vows because making a vow involves only one party. However monetary transactions involve two parties and there is no reason whatsoever that one side's prearranged condition or declaration should be binding on the other side.

Furthermore, here the condition needs to do more than effect annulment as it does for vows. An iska imposes obligations on the parties and there is no proof from Yoreh Dei'ah 311 that a general condition can do this. A further objection is that a simple declaration of intent is sufficient with vows because even after they take effect they can be annulled simply by determining that clear grounds for regret exist. However, in order for a stipulation to have the power of undermining a transaction between two parties, whether of a monetary or other nature, it must be formulated according to the halachos that govern conditions e.g. both eventualities must be expressed: "If . . . and if not" etc. A condition expressed in general terms, these gedolim argued, would not be effective.

Q. What was their opinion about the heter iska arrangements with the banks?

Rav Dvir: With regard to the banks they agreed that even a heter iska that was formulated as a generalized declaration of intent would be valid, as long as the bank adopted it as one of their regulations. This is because the banks are run as limited companies and anyone dealing with them implicitly accepts all the company's regulations. If for example, a regulation requires the signature of two people, it will not be binding so long as it only carries one signature. Heter iska is the same. It is not a one- sided agreement. There are two parties to it. HaRav Eliashiv ruled however that even though this arrangement can be relied upon, it is still best that each customer draws up an individual heter iska with the bank.

Q. Do the banks cooperate?

Rav Dvir: In the course of our institute's work and our discussions with the directorates of the banks, some of them agreed to allow the signatories in their branches to sign an iska individually with any customer who wants this. It's important to stress that only the form kept by the banks should be used because this is the only one accepted by the banks' directorates as binding, on which the signatories are authorized to sign.

Q. To judge from the information released over the years, the banks have dealt with the issue of heter iska properly. But this still hasn't solved all the problems . . .

Rav Dvir: Various additional investment opportunities are available in today's economic scene: trust funds, provident funds, training funds, pension funds. The customer's money is invested on the stock exchange in government debentures, concern debentures, exchange debentures, shares in Israel and abroad and other options.

Q. How can bonds involve problems of interest?

Rav Dvir: When a customer lends money to a company or if he purchases a corporate bond that pays interest. (This however, would not be a problem according to those who hold that there is no problem of interest in lending to a limited company (corporation). See Igros Moshe Yoreh Dei'ah 60- 3 and HaRav Eliashiv's Kovetz Teshuvos, vol. III, siman 124.)

The only way investing in debentures is permitted is where the issuing companies operate on the basis of a halachically acceptable heter iska. In this case it is sufficient that the company have a general heter. No individual iska need be made since the lender is observant and he lends on the basis of the heter iska. For this reason it is also not necessary that the iska appear on the prospectus.

Q. What about government bonds?

Rav Dvir: There is no problem of interest with funds that invest all their capital in government bonds because the government has a halachically acceptable heter iska. Furthermore, in his sefer, Har Tzvi, HaRav Tzvi Pesach Frank zt'l, permits lending to the government at interest, even though he rules stringently with regard to loans to limited companies.

Q. In that case the problem can easily be solved by the directors of the various funds signing on a heter iska.

Rav Dvir: Many people make this mistake: Signing on an iska with the Funds doesn't solve the problem because they only act as agents in making the investments. The iska must be made with each and every company that issues bonds. In addition, when buying bonds, or upon the direct issue of bonds by a company that doesn't observe Shabbos, the investor is liable to transgress the prohibition of abetting those who transgress mitzvos . (See HaRav Eliashiv's Kovetz Teshuvos, vol. III, siman 123:2.)

This is also a problem with buying shares in companies that don't have heter iska or that don't keep Shabbos or other mitzvos. There are grounds for permitting the purchase of shares in such companies. This is not considered lending at interest since the investor is open to both the company's losses and its profits (see the above teshuvoh, para. 1); neither is he a true partner. However, it is still preferable to avoid abetting Torah transgressors and possibly benefiting from Shabbos earnings.

Q. Have you taken this up with the investment companies that trade on the stock market?

Rav Dvir: We approached them and asked them to arrange a heter iska to put things on a halachically acceptable footing and their board of directors to pass a binding resolution on the matter. This is a much simpler situation than with the banks because here the Torah observant public are the lenders, not the borrowers. If they agree there is no danger of the lender questioning the agreement's validity. Although it was made clear to them that they lose nothing by signing on a heter iska and moreover, even if they sustain losses, nobody will claim the deposit back from them, let alone ask for interest, many of them wouldn't agree.

Q. Does the fact that the heter iska doesn't appear on the stock exchange prospectus have any halachic significance?

Rav Dvir: We obtained an opinion on this from the Ministry of Justice, according to which, the fact that the company's council of directors validates the heter iska is sufficient to confer legal validity and to make the issue of bonds subject to the iska, instead of being a loan on interest. Sadly though, very few companies have agreed to our request. Only if the chareidi public is insistent, demanding that its investments be made in companies that have a halachically sound heter iska and refraining from purchasing these debentures until this is done, is there a chance of more companies that issue bonds undertaking to arrange a heter iska.

Q. What about investments in trust funds, training funds and provident funds?

Rav Dvir: We've already dealt with funds that invest in bonds. Most of these funds however, invest in companies that don't keep Shabbos, or that transgress other mitzvos, such as non-kosher food. Besides the issue of interest, there is the matter of abetting transgressors and of benefiting from Shabbos earnings.

Q. Doesn't simply purchasing a share turn the investor into a partner in the company?

Rav Dvir: Not in HaRav Eliashiv's opinion, since owning a share doesn't give the purchaser any possibility or right to voice an opinion (as explained in the aforementioned teshuvoh). Nevertheless, being a shareholder does involve abetting transgressors and other Torah prohibitions. This is particularly true when shares are bought from the company at the time of their issue. It's also a chilul Hashem for chareidim to buy shares that involve all these halachic problems.

Q. Does the chareidi public have enough influence to change things?

Rav Dvir: Undoubtedly, the observant public has a lot of power to effect changes. The chareidi and observant publics have significant economic strength and this should be exploited. While we do not wish to impose our views on non- observant people, when we invest our money in the various funds we do have the right to demand that they should be run according to halochoh and that money shouldn't be invested in places that do not operate according to halochoh.

Q. The current problem also involves the pension funds, which have passed from the banks' control to that of the insurance companies.

Rav Dvir: Correct. But here too, the arrangements are the same as those we've already discussed. The funds act on behalf of the investors in buying bonds and shares. Here too, we can only succeed if the chareidi public knows how to wield its power and refrains from opening pension finds with companies that invest without any supervision. They should invest either in government bonds or in concern bonds, which have a heter iska and buy shares in companies that observe Shabbos and are not involved in any other transgressions.

In the present situation the public should demand that there be close and constant supervision over the way the various funds operate, to ensure that investments are made in accordance with halochoh. The desired result will only be achieved through public insistence and bringing concentrated pressure to bear.