Updated: Sep 20
Faith-Based Lending: An Overview
Faith-based lending takes various forms across different religious traditions. Islamic banking, for instance, follows Sharia law, prohibiting usury, or the charging of interest. Similarly, Christianity has historically frowned upon usurious practices, with varying interpretations.
The Prohibition of Interest in Judaism
In Judaism, the prohibition against charging interest, or "ribbis," on loans between fellow Jews is derived from several passages in the Torah. However, it presents a unique challenge in the modern world, where interest is a standard part of financial transactions, including mortgages.
Kosher/Halacha Compliant Mortgages
A mortgage that adheres to Jewish law, commonly known as a Kosher or Halacha compliant mortgage, must navigate the biblical prohibition against interest. There are two primary ways to accomplish this:
Involving a Non-Jewish Party: If either the borrower or the lender is non-Jewish, the prohibition against interest does not apply. Thus, a mortgage transaction involving at least one non-Jewish party would be considered compliant.
Utilizing the Heter Iska: When both parties are Jewish, a special contract called the Heter Iska can be used to make the mortgage Halacha compliant.
The Heter Iska: A Unique Solution
The Heter Iska is a contractual solution designed to enable financial activities that comply with Jewish law. Instead of structuring the mortgage as a loan, the Heter Iska frames it as a business partnership. In this arrangement:
The lender becomes an investing partner, sharing in both profits and losses.
The "interest" is considered a return on investment rather than a fee for borrowing money.
Specific terms are outlined to clarify responsibilities and the distribution of profits or losses.
By transforming the transaction from a loan into a co-investment, the Heter Iska allows both parties to conduct business in a manner that is consistent with Jewish principles.
For those seeking a Kosher or Halacha-compliant mortgage, the Kosher Finance Institute (KFI), functioning as the rabbinical council and kosher certification agency for financial institutions in the United States, currently certifies many banks and financial mortgage companies that comply with Jewish law.
Additionally, the KFI hosts the Kosher Bank directory, which lists KFI-certified lenders and includes the kosher status of over 5,000 financial institutions, aiding those who wish to transact in alignment with their faith.