Interest-Free Loans?

Each week Rabbi Yoel Domb writes about issues of business ethics related to the Torah portion of the week.

“Neither a borrower nor a lender be” goes the old English adage. The Torah might agree with the first part of this adage, but it definitely disputes the latter part. In the Torah there is both a positive obligation to extend loans to those in need of them, and a severe warning against stinginess when a person is asked to grant a loan. Even when it is possible that the loan will become defunct, the Torah still demands that it should be made. For example, during the sabbatical year many farmers are dependent on loans for survival, as they cannot profit from the produce of their fields. At the end of that year these loans become defunct according to Torah law. Yet the Torah still warned the lender: “Beware lest an evil thought enters your heart and you say ‘the seventh year is approaching ‘ and you will act cruelly towards your poor brother, and he will cry out to G-d, and it will be reckoned to you as a sin”. (Devarim 15:9)

We might well question this uncompromising attitude towards loans. After all, the Torah has strictly forbidden any interest to be taken on loans, which in itself is puzzling since the lender could easily invest the money and profit by it instead of extending a loan. Why then does the Torah obligate him to support others and even to risk losing his hard-earned riches?

Moreover the obligation seems to make no economic sense. How can a business survive if it must grant credit even in risky situations? Indeed, at a later stage in Jewish history the famous sage Hillel saw that people refrained from lending money before the sabbatical because of the understandable worry that they would not recover their assets. He therefore established the pruzbul, a legal loophole to enable the recovery of debts after the sabbatical year. If the obligation makes no practical economic sense, what then is the logic of the Torah in its demand to make these risky loans?

This question should be approached from a philosophical perspective. Judaism believes that wealth is not divided evenly and that “poverty will not cease in the world”. (Devarim 15:11) G-d made some people rich and others poor to remind us that acts of benevolence (Chesed) are the foundation of the world. The rich must do all in their power to mitigate the effect of poverty on the poor. One of the most effective ways to fight poverty is by extending credit to a poor individual so that he can recommence economic activity. This may not create total equality but it will ensure that “there will be no poor among you”, (ibid 15:4) since the poor will be adequately taken care of (either through charity or through free loans) and the rich will fulfill the function for which they were granted their riches. This ideal society will then become so affluent that it can perform the same duty on a macro level -“And you will lend to many nations and you will not need to borrow”.

All this is contingent on lending to the needy during the sabbatical year, since this is a most basic act of human kindness. There is no obligation to lend to one who has defaulted on previous loans or wasted the money he previously received (Ahavat Chesed 1:9). However, one who is temporarily short of funds and has a poor credit rating should still be given the opportunity to reestablish himself, and ultimately this will benefit the entire society -“for because of this thing G-d will bless you in all your actions and endeavors” (Devarim 15:10).

This fundamental belief in divine providence in all economic activity serves as the basis for our attitude to loaning money and doing charitable deeds. If G-d had not commanded us it would not make economic sense to make free loans, but then again, if it were not for G-d’s munificence we would not have the money anyway.

In his book In the Marketplace, Dr. Meir Tamari, the founder of the Center for Business Ethics, points out that the free loan was used to solve the problems of immigrants from Eastern Europe in the last century. Most immigrants did not have the equity with which to establish their own businesses, and the banks were wary of granting them credit, since it was difficult to assess the risk involved and many of them lacked collateral. However Jewish immigrants enjoyed the use of funds from many free loan societies, which enabled them to establish businesses and operate until they could receive credit from other sources.

Moreover, Tamari adds that another use for interest-free loan funds is to rehabilitate workers who are made redundant by firms cutting back or improving their efficiency. Many of these workers may suffer from poverty if they cannot find another job or cannot retrain themselves in order to reenter the job market. Free loan funds can then be very useful to enable such unemployed workers to set up businesses of their own or find alternative channels of employment. Another possible beneficiary from free loans could be poor students, who will ultimately be able to support themselves but need funding to reach that stage.

The Chofetz Chaim, Rabbi Yisrael Meir Hacohen, suggests that every person should have a small free-loan fund in his house, which can be used to provide loans for poor people. In this way he can do many more charitable deeds than one who lends to one richer client, and each loan is a separate Mitsva. (Ahavat Chesed part 2,chap.13) He adds: “I know that people wish to lend to more affluent people, where there is less chance that the money will be squandered…but this is the reason why the Torah had to command us to prefer the poor …and promises us that “because of this thing G-d will bless you in all your actions”. Let us deepen that belief and thereby strengthen our resolve to use our money for the real reason it was given to us -to help others.

This column presents general principles for approaching business ethics topics. For specific guidelines, please refer to a halachic authority.

Rabbi Yoel Domb is a graduate of JCT and a member of the faculty of the JCT Bet Midrash. He was awarded a fellowship from the Center for Business Ethics for the academic year 2000-2001. He is currently researching topics of business ethics in Jewish Law and is preparing a curriculum to facilitate the teaching of these topics in Rabbinical seminaries (Yeshivot).