Limits of Interest Rate for Loan with Heter Iska – part II | Beit Din Eretz Hemda - Gazit | Beit Midrash

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Case: The plaintiff (=pl) is a lender who lent 500,000 NIS to a contractor (=def) to carry out a Tama 38 project (a special plan to strengthen and improve a building in return for the right to add stories to it). They used the heter iska used by Bank Mizrachi, and the rate of interest was 18% annually plus punitive interest of $200 a day for late payment. Def gave three checks and three promissory deeds, and put certain properties in a lien to pl. Def paid 527,000 NIS but late, so that some interest was outstanding. Pl made a claim of 390,360 NIS with Hotza’ah Lapo’al, which def opposed, and the courts transferred the case to beit din. Pl claims that since def owed 135,000 NIS and it has been over three years, def owes 61% interest plus around a quarter million dollars for the punitive interest. Def claims that since he already paid more than the principal he took, he cannot be subject to punitive interest, and that it is enough to pay 18,000 NIS for outstanding interest.

Ruling: [Last time we saw that the regular interest in this case could have been permitted but the punitive interest made the total interest too high.]

More fundamentally, interest as a penalty for late payment, which does not fit into the legal logic of a heter iska, is forbidden, as we shall explain. A penalty payment that increases by the day (as opposed to a one-time penalty) is classic ribbit, as it is agar natar (reward for waiting) (Shulchan Aruch, Yoreh Deah 177:16). The Rama (ad loc.) cites those who are lenient regarding a penalty, but most disagree, and the Shach (ad loc. 33) and the Shulchan Aruch Harav posit that it is a Torah-level prohibition. The Shach is lenient in the case where there is a heter iska, but Brit Yehuda (38:9) writes that this is only regarding a one-time penalty. While there might be room for leniency regarding a corporate entity, like a bank, here we are dealing with an individual, and therefore one must not be lenient in this case.

We calculate that after def’s last payment, he owed 33,237 NIS, which increased to 37,369 NIS by the time pl went to Hotza’ah Lapo’al. After this point, interest should no longer be accrued for two reasons. First, def should not have been expected to pay because pl sued for an exaggerated amount of money. Second, a heter iska is based on the expectation that the recipient is investing the money, whereas in a case in which the "lender" is demanding the money immediately, it is apparently forbidden to invest anymore, and therefore there is no justification for the amount to increase.