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Luke 7:2-10, a centurion’s slave, who was highly regarded by him, was sick and about to die. When he heard about Jesus, he sent some Jewish elders asking Him to come and save the life of his slave. When they came to Jesus, they earnestly implored Him, saying, “He is worthy for You to grant this to him; for he loves our nation and it was he who built us our synagogue.” Now Jesus started on His way with them; and when He was not far from the house, the centurion sent friends, saying to Him, “Lord, do not trouble Yourself further, for I am not worthy for You to come under my roof; for this reason I did not even consider myself worthy to come to You, but just say the word, and my servant will be healed. For I also am a man placed under authority, with soldiers under me; and I say to this one, ‘Go!’ and he goes, and to another, ‘Come!’ and he comes, and to my slave, ‘Do this!’ and he does it.” Now when Jesus heard this, He marveled at him, and turned and said to the crowd that was following Him, “I say to you, not even in Israel have I found such great faith.” When those who had been sent returned to the house, they found the slave in good health.

This land was not called Israel in that day, at least not by the Roman authority - there was no Israel, although there was a Judea. Was Yashua (called Jesus) making a different point here in reference to the centurion - not meaning a location/designation of land, but instead a group of people that included the centurion - people of faith?

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I think Jesus' use of "Israel" here and elsewhere ignores Rome's geopolitical impositions and points directly to the nation itself. The people, all of Abraham's natural descendants, are often referred to as "Israel" throughout the gospels, for example:

Matthew 15:24 - I am not sent but unto the lost sheep of the house of Israel.

Luke 22:30 - That ye may...sit on thrones judging the twelve tribes of Israel.

If you study the 30 references in the four gospels alone where "Israel" appears, it also becomes clear that the gospel writers and their subjects had no problem referring to the region itself as Israel rather than Judea:

Matthew 2:21 - And he arose, and took the young child and his mother, and came into the land of Israel.

Matthew 10:23 - Ye shall not have gone over the cities of Israel, till the Son of man be come.

In the scripture you cited, Jesus is no doubt referring to the family of Israel along with all its converts and proselytes; but it doesn't seem likely the centurion was among them. All we know for certain is that he was a charitable, compassionate servant of Rome who loved and helped the Jewish people, though not a Jew himself. Jesus pointed to that distinction, distancing the centurion from national Israel by comparing this Gentile's extraordinary regard for Jesus' divine authority to the mixed responses Jesus was receiving from his own people.

So I think the answer to your question is this third option. In Luke 7:9 Jesus was probably not indicating "a location/designation of land," but neither was he indicating "a group of people that included the centurion - people of faith" (to my understanding, that second concept was only hinted at by Jesus two or three times, such as in John 8:44; and it was only after Jesus' resurrection that Paul expounded on the revelation that "they are not all Israel which are of Israel", because that is when Israel in large part began to suffer blindness, and the door was opened to the Gentiles).

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In the New Testament the word “Israel” occurs 68 times and the word “Israelite” 9 times, making a total of 77 times. These may be classified as follows. Those marked with “ * ” refer to a non-literal (ie spiritual) “Israel”.

  • Many instances of “Israel” (eg, Matt 27:9, Luke 1:16, Acts 5:21, etc) refer to the literal people of Israel collectively, but not a state of Israel (such is a modern idea).
  • Two (Matt 27:42, Mark 15:32) refer derisively to a “king of Israel”, despite these same people declaring (correctly) that their only king was Caesar (John 19:15).
  • Two (John 1:49, 12:13)* refer to Jesus as the King of Israel, clearly, in these cases it was not a literal kingdom but a spiritual kingdom.
  • Gal 6:16* refers to “Israel of God” – a clear distinction that Paul makes with literal Israel. Note the “kai” here is perfect example of the Granville Sharp rule of Greek grammar , and serves here as an expansion of the previous expression thus giving the more correct translation as, “Peace and mercy to all who follow this rule – to the Israel of God”. That is, the Israel of God consists of those who do not distinguish between circumcision and non-circumcision.
  • Rom 9:6* is a very clear instance where Paul makes an obvious distinction between literal Israel and spiritual Israel (“not all from Israel are Israel”) – a point he is at pains to expand upon in Rom 9-11. These chapters are the main source of “replacement theology”, that is, literal Israel being replaced by spiritual Israel, the community of Christian believers. (See discussion below.)
  • Eph 2:12, 13* is also another case where Gentiles are described as outside the citizenship of (literal) Israel, but Gentiles can become spiritual Jews by the grace of Christ alone as v13 makes clear.
  • Heb 8:8-10*. While this reference is debatable, it is my opinion that it predicts a time when spiritual Israel (including those literal Jews who have accepted Jesus as Messiah) will be partakers of the new covenant introduced by Christ Himself at the cross. This has already occurred and was predicted (as then still future) by Jeremiah and celebrated as a fulfilment in this passage of Hebrews as indicated by v13.
  • The three references* in Rev 2:14, 7:4, 21:12, I suggest, are also to spiritual Israel, rather than literal Israel.

Thus, there are numerous instances in the New Testament where “Israel” is not used of the literal “Israel of the flesh” (1 Cor 10:18).

Thus, Luke 7:9, "I tell you, I have not found such great faith even in Israel." appears to distinguish between "Israel" and the centurion and appears to be referring to literal Israel as in the several instances above.

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