In numerous places the Torah (Hebrew Bible) prohibits a Jew from borrowing, lending or being a party to a transaction that involves charging another Jew interest.1 The Hebrew term generally used is ribit, which roughly means “increase.”

The prohibition of ribit is a strange one. It applies only when both parties are Jewish, regardless of how rich or poor they may be. However, a Jew is permitted to borrow money from a non-Jew and pay interest to him on the loan, thereby enriching him; and a Jewish person is also permitted to lend money to a non-Jew who asks for a loan and collect interest from him, just as non-Jews are permitted to lend and borrow money to and from each other with interest. Why the difference?

When it comes to forbidding theft, fraud and the like, the Torah makes no distinction between Jew and non-Jew. But then, unlike theft and fraud, there’s nothing unfair or underhanded about charging or paying interest on a loan, since both parties knowingly consent to the transaction.

Neither is it inherently deleterious to society. On the contrary, loans and interest are the two poles of the turbine that drives a healthy economy. When loans are available, merchants can make greater profits, builders can build bigger buildings, entrepreneurs can bring new ideas and inventions to the market, and families can live in better homes.

That translates as more class mobility, more jobs, more food, more clothing, more leisure time and more choices of how you want to live.

If there were no interest, there would be no incentive for anyone to make these loans. Money, after all, begets more money. You can put your money to work to earn a profit buying and selling, building and renting—so why should you be prohibited from charging a fee while your money lies idle, thereby incurring a loss of potential gain?

Loans on interest, then, benefit both the lenders and the borrowers.

Nevertheless, between Jews, loans with even the slightest amount of interest are forbidden, regardless of how rich or poor either party may be, or what use the money will go for. A Jew who wishes to invest in another Jew’s financial project can do so only by entering into some form of partnership (called in Jewish law a heter iska, which we will get to later).

So Why Is It Forbidden?

Looking at things this way, the question is turned around: If there is nothing inherently evil about interest, why then does the Torah forbid the practice between Jews?

True, there are many instances in which reckless interest rates can destroy an entire family. But the Torah could simply set guidelines establishing when interest may not be charged, and fix reasonable rates for instances when interest is fair play. Indeed, when it comes to the sale of merchandise, the Torah forbids exorbitant profit margins on staple products.2 Why not do the same here? Why forbid interest altogether?

Both Ramban (Rabbi Moshe ben Nachman, 13th century) and Rabbi Don Yitzchak Abarbanel (15th century) agree3 that as long as rates are reasonable,4 there isn’t necessarily anything morally wrong with ribit.

They explain that the reason Torah prohibits ribit between Jews is simply because your fellow Jew is family. It’s just not appropriate for family members to help each other out on terms of interest. The Jewish nation is meant to behave as a cohesive unit, like a single organism, each one concerned for the other’s benefit as much as with his own.

On the other hand, neither is it practical to treat the entire world as your immediate family—especially when they do not have the same laws as you. If you did, you would quickly find yourself out of resources.

So, although we accept the Torah’s ban on charging our fellow Jews interest, it would not be wise or helpful to extend this to all people. The Torah thereby renders us somewhat like a healthy organism swimming among many others in a big pond, which seeks its own balanced ecology.

How Do Jews Do Business Without Loans?

When commerce increased and investments became a more common part of life, the rabbis established guidelines for partnerships. This is the heter iska mentioned above. One person provides the money while the other makes a profit with it, which both of them share. The rabbis set fixed terms on such partnerships, both to distinguish them from ribit as well as to ensure they would be conducted in a fair and equitable way for both parties.

To this day the heter iska is in common use, especially in Israel. A competent rabbinic authority must be consulted to draw up such a document between parties.

But the institution of free loans has nevertheless always flourished in Jewish communities. In every major Jewish community, and in most smaller ones, there has always been a free loan society to provide interest-free loans to those who qualify. This way, everyone in the community can collaborate in a great mitzvah, which in the long run benefits all.

Indeed, Maimonides lists the interest-free loan as one form of the highest level of charity, along with providing someone a job or entering into a partnership with him, since this preserves the borrower’s dignity and enables him to get back on his own feet.5

Some Laws of Interest

The laws of ribit are extensive and complex. Here are just a few pointers:

  • Ribit does not apply only to loans; it applies anytime one pays more than the actual debt. As such, it would also apply to things like rent or purchases.6
  • In many cases, ribit would apply to “early bird specials.” (This is because the buyer is essentially paying less for having advanced money to the seller before the sale is actually realized; this is similar to a debt that the seller owes you, where he is then giving you more (e.g., a discount) than he is being given. For more on this, see Are Early Bird Specials Kosher?)
  • Even if both parties are in complete agreement (and even if the money was already lent), it is still prohibited to pay ribit.
  • Ribit applies not only to money, but to lending and borrowing items as well. So to borrow a few eggs from your neighbor and then pay her back with a full dozen would be problematic.7
  • Until the loan is paid, it’s forbidden for the borrower to do the lender any favor he would otherwise not have done.8

Redemption on the Merit of Interest-Free Loans

The Torah itself gives the prohibition of ribit as one of the reasons G‑d took us out of Egypt.9 Rabbi Yehuda Loewe, known as the Maharal of Prague, explains that G‑d desires the unity of the Jewish nation, and it is for this purpose that He redeemed us from Egypt and gave us the land of Israel.10

When people assist each other, they are uniting through their act of kindness. One who takes interest acts in the opposite manner, taking advantage of his fellow Jew’s misfortune in order to enrich himself. It is for this reason that throughout the generations Jews have scrupulously kept the prohibition of ribit, and Jewish communities generally set up interest-free loan organizations.

In the merit of Jewish unity, not only were we redeemed from Egypt, but we will merit the final redemption. May it be speedily in our days!