In this Mishnah, we’ll talk about interest that comes from investments. In the times of the Mishnah, when a business deal took place, there would be two different partners involved in one business: the mashkia and the mit’asek. The mashkia was the investor who provided the capital needed for the business, and the mit’asek was the broker who dealt with the logistics and the labor of getting things done.
The mashkia, the investor here, wanted to ensure that he didn’t put up 100% of the income and take 100% of the risk. So, at first, the mashkia would put up 50% of the funds as an investment. He would provide the other 50% of the funds needed for the business as a loan to the mit’asek, and then the mit’asek would put that money right back into the business. So he also shared the risk and, at the same time, shared in the potential reward of the business. If they lost money, they both lost money, because the mit’asek, the broker—the logistics man—was still obligated to pay back the investor, the mashkia. If they made money, they both made money. But in all scenarios, 50% of the money would have to be paid back to the mashkia. That’s the way things worked.
Even though the investor here may get back more money than he gave the broker, it’s considered profit from the investor’s half of the business, not profit from the loan he gave to the mit’asek. The Mishnah is going to talk about one more requirement needed to make sure this deal is not interest—that the mashkia is not benefiting from the loan he gives to the mit’asek, the laborer, the broker here. There’s another requirement to make sure it’s really profit from the mashkia’s investment, as opposed to interest from the loan he provided to the mit’asek.
The Mishnah starts with the case of a storekeeper. The Mishnah says that a person is not allowed to approach a storekeeper and tell him to sit and sell produce in exchange for half of the earnings. He’s not allowed to tell a storekeeper, “Here’s the capital I have,” using the arrangement we spoke about in the introduction to the Mishnah. “Here’s the profit. I want you to sell produce at a certain price. I want you to sell it for a higher price, and we’ll split the profits.” It’s according to the arrangement we mentioned earlier: half of the capital—which here he is providing as an actual product—comes in as a 50% investment from the investor, and the other 50% of the product comes in as a loan to the storekeeper, which he puts right back into the business. You can’t do that.
Why? In another case, he’s not allowed to give the storekeeper money and tell him to buy produce and sell it in exchange for half of the earnings. Again, the same model is being used here. To mitigate the risk, the investor structures the deal so that 50% is his investment and another 50% is a loan to the storekeeper to buy the product. He can’t do that. Why? What condition does he need to meet to allow this to work? The only way this works is if he gives the storekeeper a salary as a worker.
The way things are structured, half the produce, as we said, is a loan from the investor to the storekeeper, and half is money that the investor is putting in on his own. So, for all intents and purposes, the storekeeper is an equal partner and an investor in the deal. They both put up 50% of the capital because the investor loaned 50% to the storekeeper. But who’s doing all the work? The storekeeper. He’s buying, selling, and doing everything in terms of the logistics, and he’s not getting paid for his work. So it seems that he’s providing a free service to the investor because the investor loaned him money to put into the business. Therefore, that free service is a problem of collecting interest. The investor has to pay the storekeeper a salary. That will offset all the labor he’s doing on behalf of the business. Then, in terms of owned equity, they would both own an equal amount of equity here, and there would be no problem of interest.
The same halacha (Jewish law) applies to somebody who’s raising chickens or young animals. You’re not allowed to give eggs to a farmer and have his hens sit on them so they hatch into baby chicks, and then have that farmer raise the chicks, with the profits and losses split between the two of them. Again, this is structured in the same way to mitigate risk for the investor: a 50% investment on his part and a 50% loan to the farmer.
Again, I’m not allowed to assess the value of calves or young horses and give them money. I’m not allowed to give them to a herdsman—somebody who deals with horses—to raise for half the profits and losses, unless the investor gives the farmer or the person who deals with the horses a salary for dealing with the investor’s half of the animals and providing half of the food the animals need. If he doesn’t give them that, then the person’s work is basically for free, and it’s considered interest because of the so-called loan the investor gave him.
Here again, the farmer or herdsman is taking ownership of 50% of what the investor gives him in order to mitigate risk for the investor. So he owns half of it, and therefore they’re both equal partners in the business. But who’s doing all the work? The farmer or the herdsman. So he needs to collect a salary to take care of the business. Then the equity in the business could be owned equally by both of them. They both technically put up half of the money.
Now we’ll see where you don’t have to pay for the work. The herdsman is allowed to accept calves or baby horses if they didn’t assess the value of those animals before the partnership took hold. That would tell us that the only thing they would both split would be the profits. The herdsman—the person dealing with the horses—would not be responsible at all for the losses. So we would say that when he receives these animals, he’s not receiving half of them as a loan. He’s just caring for animals fully owned by the owner, and the 50% of the profits he gets are in exchange for the labor and feed he provides. So there are no profits because of a loan or equity he has in these animals. He has no equity in them. The animals are owned 100% by the investor, the one putting up these animals. He’s trading his services—feeding and caring for the animals—in exchange for 50% of the profits. Therefore, in this case, there would be no need to pay the herdsman a salary. His salary is 50% of the profits. We could consider the fact that, since he has no loss here, the deal is structured so that he has no equity in the horses, and the animals put up are not considered a loan to him whatsoever.
Another issue the Mishnah is going to tell us about is how long a herdsman is expected to raise the young animals he’s caring for. From the beginning of time, until he was born, he has to raise these horses until they’re grown to a third of their size. As for the chamor (donkey), when a person agrees to raise one for 50% of the profits, with no risk of loss, he has to raise it until it can carry a full load on its back.