Lending without Interest

by R B Yehezkael (Haskell)

Here in brief are some ideas from my paper:

This article describes a dream, which is inspired by the words: “If thou lend money to My people, even to the poor with thee, thou shalt not be to him as a creditor; neither shall ye lay upon him interest.” (Exodus 22:24). This dream is a response to an economic nightmare we experienced in Israel, not so long ago, and from which we must learn.

There were years in which prices increased by 25% every month or two, and penalty interest rates reached about 1760% per annum. I clearly remember seeing a sign on a shop selling car accessories warning – “deferred payments bear interest of 4% a day”.

During those years, three zeroes were removed from the currency – remember the lira and the shekel before the new shekel. Sadly, there was a state of economic collapse, and tragically, some committed suicide because of escalating debts.

This dream is also a reaction to an old nightmare in which the Jew, and in particular the Jewish moneylender has been portrayed as a villain, and persecuted. Let us hope, that with God’s help, these nightmares never return.

In spite of all this there were things to be proud of during those years of high inflation. The “Gemach” for example, continued to give interest-free loans. Also, I remember a radio programme where people phoned in to make contributions. Instead of money, some gave “a day”, “a week” whilst a friend even contributed “a month”. Contributing time had become more meaningful than contributing money, which was collapsing.

These events somehow gave me the idea of interest-free linkage to the average wage or income, which will be explained in the following.

Linkage not interest

We are forbidden to take interest on loans. On the other hand it is unfair to the lender if inflation erodes the value of his money. In order to deal with this problem, debts can be linked. By “linkage” we mean that the debt and debt repayments rise and fall in proportion to some index, e.g. prices, wages, foreign currency, etc. It is proper to ask which formulae for calculating indices and which methods of linkage are reasonable from both a “Torah” and scientific viewpoint.

Wages not Prices

An index formula should be both accurate and stable. “Stable” means that unrealistic prices, which do not result in a significant amount of sales, should have little or no effect on the value of the formula. These matters are particularly important when debts are linked to an index formula. The issue of accuracy is both a scientific and Halachic requirement. Stability of the index formula is important for economic stability.

We have used a computer to simulate test situations where the true average index value is known. We observed that the formula for measuring wages was accurate in all our tests, whereas the formula used for measuring prices was accurate only when there was no correlation between price and quantity.

We also noted that the formula used for measuring wages has good stability characteristics, whereas the formula used for measuring prices has poor stability characteristics.

For these and other reasons, linkage to prices is not a good choice. Linkage to wages seems a good choice but under what conditions would this be halachically acceptable?

When lending to the needy, it is correct in my opinion, not to use linkage; neither to take interest.