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May One Convert a Loan Into Equity?

Rabbi Yosef Dovid Josilowsky

 

Case: Reuven lent $1,000 to Shimon, but rather than asking for the money to be returned, Shimon suggested that Reuven use the money towards a 50-50 business partnership between the two of them. 

Question: Would converting this loan money into an investment raise any problem of ribbis

Answer: Converting a loan into an investment is theoretically permitted if all of the conditions that we have discussed in the previous sessions are fulfilled, such as ensuring that a real system of profits and losses is set up as well as a method of dealing with the work done (see previous session). 

However, one important technical issue that must be addressed is that of kinyan. According to the Mordechai (quoted in the Shach as well), in order to convert a loan into an investment while avoiding ribbis issues, a kinyan must be performed, as the status of the money cannot change based on a verbal declaration alone. 

One method of doing this is for Shimon to return the money to Reuven and then have Reuven give the money back to Shimon as equity. Alternatively, a kinyan sudar may be performed as well without having to transfer the actual funds back and forth.  

Another interesting question (which is subject to a machlokes Acharonim) that arises based on this Mordechai is whether the investor can change the terms of the investment after an agreement has been made from a 50-50 split of the profits to a 60-40 division. 

This question was presented to the Bais Havaad at one point and involves issues of Choshen Mishpat (whether it is permitted for one party to change the agreement in this manner) as well as issues of ribbis. In that case, the final pesak was that the division of profits could not be switched in the middle, and remained at 50-50. 

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