The translation of Heter Iska is ‘partnership clause’.
The Torah strictly forbids the collection or payment of interest on a loan, granted from one Jew to another. Given that law, there is a procedure, called HETER ISKA (“partnership clause”) by which it is permitted to profit from funds (monies) extended to one’s fellow.
A HETER ISKA contract stipulates that the money is not a loan but an investment in a joint business venture, with profits to be shared between the owner of the capital and the one who has been granted the right to use it and deal with it.
The key question about a HETER ISKA is the following: Why is interest on a loan forbidden while profit sharing on an investment is permitted?
Legally, the difference is that in the case of a loan the money is no longer the property of the lender. From the moment the borrower receives it, it is his in every respect (on the premise that he assumes the obligation to make a payment for the same amount to the lender at some future date).
So, if the lender were to collect a fee or percentage, he, the lender, would be charging interest for money that was lent, something the Torah forbids.
When there is a HETER ISKA agreement, the money remains the property of the investor (in partnership with the one to whom the money has been entrusted) and the compensation he receives is not “free profit,” but profit that his investment is currently generating.