What Is Wrong with Charging Interest?

The Law

The Torah’s earliest collection of laws, referred to by scholars as the Covenant Collection, contains a prohibition to lend money with interest to fellow Israelites:

^{שמות כב:כד} אִם כֶּ֣סֶף תַּלְוֶ֣ה אֶת עַמִּ֗י אֶת הֶֽעָנִי֙ עִמָּ֔ךְ לֹא תִהְיֶ֥ה ל֖וֹ כְּנֹשֶׁ֑ה לֹֽא תְשִׂימ֥וּן עָלָ֖יו נֶֽשֶׁךְ:

^{Exod 22:24} If you lend silver (=money) to my people, to the poor among you, do not act toward them as a creditor; exact no interest from them.^[1]

The biblical prohibition against charging interest is the only such restriction known to us from the Ancient Near East.^[2] What exactly is the Torah prohibiting in this verse?

Let us look at each element of the verse:

1. “My People” (אֶת עַמִּי): What About Not-Israelites?

The simple meaning of the verse is that if an Israelite lends a fellow Israelite money, he may not charge interest, implying that if he loans a non-Israelite money, he may charge interest. Rashi, however, expanding upon on a midrashic reading of the text found in the Mekhilta d’Rabbi Ishmael, rereads the verse to discourage lending to non-Israelites:

וְכֵן מַשְׁמָעוֹ: אִם כֶּסֶף תַּלְוֶה – אֶת עַמִּי תַּלְוֵהוּ וְלֹא לְגוֹי…

This is its meaning: “If you loan silver” – loan it to my people and not to a non-Jew…

Rashi parses the verse against its plain syntax and even against the Masoretic teamim (cantillation marks),^[3] thereby changing the simple meaning of the phrase. Now it means, if you are going to loan anyone money, make sure it is to an Israelite, but this is clearly not the simple meaning of the verse.

Deuteronomy and Loans to Non-Israelites

The verse in Exodus implicitly divides between how a fellow Israelite should be treated financially and how outsiders may be treated. The Deuteronomic law collection makes this point explicit:

^{דברים כג:כ} לֹא תַשִּׁיךְ לְאָחִיךָ נֶשֶׁךְ כֶּסֶף נֶשֶׁךְ אֹכֶל נֶשֶׁךְ כָּל דָּבָר אֲשֶׁר יִשָּׁךְ. ^כג:כא לַנָּכְרִי תַשִּׁיךְ וּלְאָחִיךָ לֹא תַשִּׁיךְ לְמַעַן יְבָרֶכְךָ יְ-הוָה אֱלֹהֶיךָ בְּכֹל מִשְׁלַח יָדֶךָ עַל הָאָרֶץ אֲשֶׁר אַתָּה בָא שָׁמָּה לְרִשְׁתָּהּ.

^{Deut 23:20} You shall not deduct interest from loans to your kinsman, whether in money or food or anything else that can be deducted as interest. ^23:20 You may deduct interest from loans to foreigners but do not deduct interest from loans to your country-men, so that YHWH your God may bless you in all your undertakings in the land that you are about to enter and possess.

Deuteronomy changes the referent from “my (=God’s) people” to “your kinsman,”^[4]Deuteronomy’s favored term for “fellow Israelites,” emphasizing that this law is about the proper way to treat “family.” Moreover, the second verse explicitly notes that Deuteronomy envisions Israelites loaning money to Israelites and non-Israelites alike, but it is permitted to make profit from the latter but not the former.

2. The Poor Among You (אֶת הֶעָנִי עִמָּךְ) or any Israelite?

The verse opens with an ambiguity:

^{שמות כב:כד} אִם כֶּסֶף תַּלְוֶה אֶת עַמִּי אֶת הֶעָנִי עִמָּךְ…

^{Exod 22:24} If you lend silver to my people, to the poor among you…

This phrasing is surprisingly unclear; what is the relationship between the phrase “to the poor among you” and “my people”? This ambiguity leads to Rashi’s interpretation, again found in Mekhilta d’Rabbi Ishmael:

וּלְאֵזֶה מֵעַמִּי? אֶת הֶעָנִי, וּלְאֵיזֶה עָנִי? לְאוֹתוֹ שֶׁעִמָּךְ.

Which among my people? The poor. And which poor person? The one that is “with you.”

Rashi’s reading splits the phrase “the poor among you” into two separate categories, “the poor” anywhere, and “those among you,” meaning local poor. This midrashic parsing, found originally in the Mekhilta but appearing ubiquitously afterwards in Rabbinic literature, is how this verse becomes the basis of the Rabbinic ruling “the poor of your own town come first” (עניי עירך קודמין; b. Bava Metzia 71a).

Financial Straits

The simple meaning is that loans are for the poor, and the second phrase is merely spelling this out. In other words, the Torah is not speaking about business loans here, but assistance for a fellow Israelite in financial straits. This is made explicit in a law recorded in the Holiness Collection in Leviticus:

^{ויקרא כה:לה} וְכִי יָמוּךְ אָחִיךָ וּמָטָה יָדוֹ עִמָּךְ וְהֶחֱזַקְתָּ בּוֹ גֵּר וְתוֹשָׁב וָחַי עִמָּךְ. ^כה:לו אַל תִּקַּח מֵאִתּוֹ נֶשֶׁךְ וְתַרְבִּית וְיָרֵאתָ מֵאֱלֹהֶיךָ וְחֵי אָחִיךָ עִמָּךְ. ^כה:לזאֶת כַּסְפְּךָ לֹא תִתֵּן לוֹ בְּנֶשֶׁךְ וּבְמַרְבִּית לֹא תִתֵּן אָכְלֶךָ.

^{Lev 25:35} If your brother, being in straits, comes under your authority, and you hold him as though a resident alien, let him live by your side: ^25:36 do not exact from him advance or accrued interest, but fear your God. Let him live by your side as your kinsman. ^25:37 Do not lend him your money at advance interest or give him your food at accrued interest.

In other words, this law comes into effect when a fellow Israelite, “your brother,” has a financial reversal and you are the local landowner upon whose largess he is going to have to live. In short, none of the three iterations of the law have anything to say about business interest to fellow well-off Israelites. (More on this later.)

3. What Does “Acting Like a Creditor” (לֹא תִהְיֶה לוֹ כְּנֹשֶׁה) Mean?

The word נֹשֶׁה (nôšeh) puzzled ancient translators and interpreters, and it is the one element of this verse not echoed in Deuteronomy (or Leviticus). The NJPS and the NRSV translate it as “creditor,” which is a neutral, descriptive term.^[5] The Septuagint, however, translates it as “like one who presses down” (κατεπείγων) and Targum Onqelos prefers כְּרָשְׁיָא, “like a pressing creditor.”^[6] These latter emphasize a moral problem with creditor-like behavior.

The simple point is that a person should not try to collect on a loan that the borrower cannot repay, i.e., not to try and squeeze blood from a stone (to paraphrase a well-known proverb). But what is immoral about people trying to collect money owed them?

Benefiting the Lender or the Borrower?

The Sefer Ha-Chinukh (#73[or 67]), an anonymous thirteenth-century halakhic work that derived no less than three independent mitzvot from Exodus 22:24,^[7] explains how not pressuring a borrower will make the lender into a better person:

לקנות לנו מדת החסד והחנינה והחמלה

To help us develop the virtue of kindness and empathy and compassion.

Rashi, in contrast, focuses on the emotional harm to the borrower, on the shame that a creditor brings to a debtor who cannot pay. Moreover, Rashi offers a much more expansive meaning for “acting like a creditor,” going far beyond merely not asking for money he doesn’t have:

לא תתבענו בחזקה, אם אתה יודע שאין לו אל תהי דומה עליו כאילו הלויתו אלא כאילו לא הלויתו, כלומר לא תכלימהו.

Do not demand from him with force, if you know that he doesn’t have it, don’t act toward him as someone who lent him money but rather as someone who hasn’t lent him money. In other words, don’t shame him.

To be in debt is seen as shame-worthy, and a loan is more dignified than a “handout,” since it is based on the implicit assumption that the person can pay it back. Nevertheless, Rashi says, if the person cannot pay it back, not only may you not demand it from him, but you must pretend that the loan never happened.

4. The Bite of Interest (לֹא תְשִׂימוּן עָלָיו נֶשֶׁךְ)

The word נֶשֶׁךְ is a homograph with the Hebrew root for “bite.”^[8] This similarity serves as a trigger for a derash from Rashi (drawing from the Tanchuma):

נֶשֶׁךְ – רִבִּית, שֶׁהוּא כִנְשִׁיכַת נָחָשׁ שֶׁנוֹשֵׁךְ חַבּוּרָה קְטַנָּה בְּרַגְלוֹ וְאֵינוֹ מַרְגִּישׁ, וּפִתְאוֹם הוּא מְבַטְבֵּט וְנוֹפֵחַ עַד קָדְקֳדוֹ, כָּךְ רִבִּית אֵינוֹ מַרְגִּישׁ וְאֵינוֹ נִכָּר עַד שֶׁהָרִבִּית עוֹלֶה וּמְחַסְּרוֹ מָמוֹן הַרְבֵּה.

Nešekh – Interest, which is like the bite of a snake who makes a small bite in his leg and he doesn’t feel [anything] and suddenly it bulges and swells to his head. Thus is interest, which is neither seen nor recognized until it increases and causes the loss of much money.

By comparing interest specifically to a snake bite, the derash underlines the danger of interest, which sneaks up on people and does them great financial harm.

Two Types of Interest?

The Hebrew term for interest, נֶשֶׁךְ (nešekh), appears in all three of the Torah’s legal collections prohibiting interest, and in Leviticus, it is paired with תַרְבִּית (see also Ezek 18:8, 13; Prov 28:8), which also means interest. This seeming redundancy has led many commentators to understand these terms as two different types of interest.

• NJPS translates נֶשֶׁךְ as “advanced interest” (i.e., paid at the time of the loan or earlier) and תַרְבִּית as “accrued interest” (i.e., paid upon the repayment of the loan or after).

• The Mishnah (Bava Metzia 5:1), however, understands נֶשֶׁךְ as an advance agreement that the borrower will pay back more than the amount of the original loan and תַרְבִּית as paying back the loan of one form of produce with another form of produce that has risen in value, that the borrower did not have on hand at the time of the deal.

Although the verse in Leviticus may very well be including more than one form of interest, it is unlikely that the inverse is the case, namely that Exodus and Deuteronomy meant to forbid only one form of interest. Instead, these sources probably meant נֶשֶׁךְ as a catch-all term for interest. In all three sources, the point appears to be that an Israelite should not apply the “bite” of interest to loans given to his poor brethren.

5. Silver (אִם כֶּסֶף תַּלְוֶה) or Produce?

The verse refers to a loan of silver, but what use would poor people in Iron Age Israel^[9] have had for “silver”?^[10] As we have little evidence for a market-based economy, silver would most likely be used for big purchases like land (Gen 23:10-16) or slaves (Gen 37:21). Silver was the kind of loan you would make to a landowner who sought to keep his (or her?) land from being repossessed rather than to the chronically poor.

Is the term “silver” in Exodus meant to be inclusive of all commodities or exclusively limited to silver?

Including Food Loans: Leviticus and Deuteronomy

Deuteronomy picks up on this ambiguity and expands the list to be all inclusive: “interest from your loans whether in money or food or anything else” (נֶשֶׁךְ כֶּסֶף נֶשֶׁךְ אֹכֶל נֶשֶׁךְ כָּל דָּבָר). Leviticus similarly adds food to the list, “Do not lend him your money at advance interest or give him your food at accrued interest” (אֶת כַּסְפְּךָ לֹא תִתֵּן לוֹ בְּנֶשֶׁךְ וּבְמַרְבִּית לֹא תִתֵּן אָכְלֶךָ).

According to the passages in Leviticus and Deuteronomy, Israelites cannot ask to receive back more than the exact amount loaned of any product, whether it be silver or food or anything else. The added specification in those two passages highlights its absence in Exodus, which may only be envisioning loans to an Israelite landowner in financial collapse, as opposed to loans to the starving poor in need of food. If so, the passages in Leviticus and Deuteronomy expand the rule to include an even more humanitarian goal.^[11]

Business versus Personal Loans

The reference to the poor or “being in straights,” the prohibition of acting like a creditor, and the discussion of food loans in Deuteronomy and Leviticus make it clear that the Bible is discussing only personal loans. This is also why the Torah treats loaning with interest as an ethical violation.

The Tanakh never discusses what we would call business loans, which deal with production rather than consumption.^[12] Such loans do not take advantage of poor people in dire straits but reflect a reasonable demand on the part of lenders to ensure that their money is being put to profitable use.

The Amorality of Business Interest: Adam Smith

Charging interest is a necessary part of market life. Like charging rent, business interest is amoral, i.e., neither moral nor immoral, just business. The great economist, Adam Smith (1723-1790), defines interest as a form of “stock,” i.e., part of the ownership and functioning of businesses:

That [revenue] derived from it [stock] by the person who does not employ it himself, but lends it to another, is called the interest or use of money. It is the compensation which the borrower pays to the lender, for the profit which he has an opportunity of making by the use of the money. Part of the profit naturally belongs to the borrower, who runs the risk and takes the trouble of employing it; and part to the lender, who affords him the opportunity of making this profit.^[13]

Smith treats interest dispassionately as a standard business reality and a relatively minor form of stock payment. ^[14]

Extending the Prohibition to Business Loans

It is possible that the biblical authors may have agreed with Smith’s sentiment, since they never speak about business interest one way or the other. However, the rabbis may have seen matters differently, since they applied the biblical prohibition to all forms of interest, including business loans. This is never stated in the Talmud, but simply taken for granted.

This fact of rabbinic law is stated explicitly in the glosses of R. Moses Isserles (Remah, 1530-1572) on the Shulchan Arukh (Yoreh Deah 160:1):

ואין חילוק בין אם מלוה לעני או לעשיר.

There is no distinction between a loan to a poor person or a loan to a wealthy one.

The Vilna Gaon (R. Elijah of Vilna, 1720-1797), in his gloss on the Shulchan Arukh (ad loc.), explains R. Isserles’ point:

ר”ל אף על גב דנאמר וכי ימוך כו’ אל תקח כו’ ופשוט הוא בכמה מקומות

His point is that even though [the Torah] states (Lev 25:35-36) “if your brother, being in straights… do not take…” [this does not mean the prohibition is limited to the poor], and this is clear in many places [where the Rabbis apply the prohibition to any loan].

The Vilna Gaon is certainly correct that this across the board application is clear in rabbinic, as opposed to biblical, texts. Why would the Rabbis read the Torah in such a counterintuitive way, ignoring all the references to the poor and the humanitarian critiques, and apply the prohibition even to business loans?

Greek Antipathy for Interest

Unlike the biblical authors and Adam Smith, Greek and Roman thinkers express great discomfort with all forms of interest, including business interest. As Aristotle writes (Politics 1258b):

Petty usury (ὀβολοστατική, lit., a weigher of obols, 1/6 of a drachma) is most reasonably hated, because its gain comes from money itself and not from that for the sake of which money was invented. For money was brought into existence for the purpose of exchange, but interest increases the amount of the money itself—and this is the actual origin of the Greek word (τόκος means both “offspring” and “interest”): a child resembles a parent, and interest is money born of money. Consequently, this form of the business of getting wealth is of all forms the most contrary to nature. ^[15]

For Aristotle, interest of any kind is unnatural and morally suspect. The Rabbis of the Mishnah lived in a Hellenistic world and imbibed many of its values. Thus, the Greek antipathy for interest of any kind may explain why the Rabbis understood the biblical prohibition to refer to even business loans.

Turning Loans into Business Partnerships: The Heter Isqa

Conceivably, had Greek and Roman thinkers not condemned interest in all forms, the halakhah might have allowed business loans to fellow Jews with reasonable rates of interest. But the rabbinic extension of the biblical prohibition led to an impossible situation for people wanting to borrow money for business ventures.

To remedy this problem—ironically of their own making—the rabbis devised a legal fiction known as the heter isqa (lit., permission to conduct business”), that turns a loan into a business partnership.^[16] This legal instrument made the “borrower” and “lender” fictional “partners” in the venture and thus entitled to half of all profits and responsible for half of all losses. The lender, though, forfeits her or his right to profits in return for a predictable revenue stream. In practice the deal thus looks like an interest payment, although it is technically a fee or penalty. Below is the relevant clause from the Star-K’s heter isqa:^[17]

We have agreed to a condition that if __________________ (the Recipient) will give ______ % of the money deposited in his charge per year to _________________ (the Investor), the Investor shall have no further claim to the rest of the profit. The Recipient has been given a wage for his labor.

Although the heter isqa was designed for business loans, it can technically be used for any loan; a heter isqa kelali (“general heter isqa”) is used by Israeli banks automatically for all loans. Moreover, it treats interest as a technical rather than a moral matter. It brings us much closer to Adam Smith.

Applying the Torah’s Concerns to Modern Life

The heter isqa can in theory be used in all loans, i.e., even humanitarian loans. But it is important not to lose sight of the Torah’s moral problems with charging interest to the poor and people in financial collapse; charging these people interest on loans is a moral problem that is as real today as it was three thousand years ago.

Payday Loans

One need not look far to see such immoral lending practices, particularly in the so-called “payday loans.” These outrageous loans, usually small and given at high interest rates, target the working poor who have little access to the conventional banking system. They are to be paid back with the next paycheck but often the interest keeps compounding until the debts exceed the paychecks.^[18] They have become a classic case of nešekh (interest) as nešikha (bite), often sneaking up to drown borrowers in debt. The Torah’s prohibitions should sensitize us to this wrongful behavior and drive us to work against it.

Free Loans for the Working Poor

At the same time, the Torah suggests a positive response to poverty, a return to free-loan associations. Such institutions, which were common among immigrant and other groups that were shut out of our banking systems, have largely been marginalized. But by providing loans to the needy without charging interest they embody the spirit of Exodus 22:24.

Organizations such as the Hebrew Free Loan Society and Kiva are, to my mind, exemplary in their commitment to a compassionate, ethical, and effective approach to poor relief.^[19] But whether we support such institutions or not, our commitment to avoid profiting from the misfortune of others should be unshakeable.