Torah law forbids demanding "Ri’bit" – interest on loans – from another Jew. Although lending money to those in need of a loan constitutes a great Misva, this is true only of interest-free loans; lending on interest violates a Torah prohibition. The Torah forbids not only receiving interest, but paying interest, as well. Hence, even if a person is in desperate need of cash and agrees to pay a certain percentage of interest in order to secure a loan, one may not lend him on interest.
The Talmud emphasizes the particular gravity of this transgression, warning that lending on interest can cause a person to lose his property, and is equivalent to the denial of the Almighty's existence. According to one view, this violation can also interfere with Tehiyat Ha'metim – the eventual resurrection of the dead. (Yore Deah 160:4)
The issue of Ri’bit arises not only in the context of private, personal loans, but also in the framework of commercial transactions. Businesses very often charge a higher price for merchandise if the consumer pays in installments. In essence, this extra charge constitutes Ri’bit from the Rabbis. The seller gives the merchandise after receiving only partial payment, effectively granting a loan to the consumer by not demanding the outstanding amount. By charging extra for this "loan," the business transgresses the prohibition of Ri’bit.
It is therefore imperative for every business to have copies of a document called a "Heter Iska" which circumvents this prohibition through a legal loophole of sorts. This document declares that the money is given not as a loan, but rather as a commercial investment, whereby the lender and borrower become partners and agree to evenly split the profits and losses earned or incurred with these funds. A stipulation is made that if the borrower incurs a loss with the money, he must nevertheless return the borrowed sum and an additional amount unless he is prepared to swear in Bet Din (the Rabbinical Court) that he incurred a loss. Since nobody wishes to make such an oath in court, the practical effect of this arrangement is that every borrower will have to repay the sum plus the additional "interest." This does not violate the prohibition of Ri’bit because he pays the additional amount not as interest on a loan, but rather as the lender's share of the profits made with the money he invested. Even if no profits are earned, the lender will nevertheless pay the extra amount in order to avoid having to make a formal oath in Bet Din.
Thus, every businessman must have copies of this document and sign it whenever he lends money to a Jew or charges a Jew a higher amount when payment is rendered in installments.
Summary: Receiving or paying interest for a loan given to another Jew constitutes a grave Torah violation; even if a borrower agrees to pay the lender interest, he may not do so. This applies as well to charging a higher price for merchandise when payment is rendered in installments. One who wishes to lend a Jew on interest or charge a higher price for delayed payment may do so only if he and the borrower sign a document called a "Heter Iska," which transforms the loan into a commercial investment.
See the book- "Pure Money" by Dayan Cohen, pages 201-202.
