Shariah Issues in Multi Level Marketing
By : Ust Hj Zaharuddin Hj Abd Rahman
www.zaharuddin.net
Multi Level Marketing (MLM)
is very popular in Malaysia, used not only in promoting consumer goods
but also in promoting financial instruments such as Islamic unit trust
funds and Takaful products. Statistics show that in year 2003 the MLM
industry in Malaysia has recorded sales of more than RM 4 billion and
more than 3 million people are involved in MLM transactions.
The above statistics render
evidence that MLM is now a widely acceptable marketing strategy used by
various companies and industries. This phenomenon has raised a lot of
concerns and queries among the general public especially form the
Shariah (Islamic law) point of view regarding the Islamic legality of
income earned by joining these MLMs. However, rarely do we come across
Shariah scholars (both locally and overseas) that analyze and evaluate
MLMs in order to provide definite answers and guideline to the general
publics’ queries. The complex issues in MLM and perhaps the lack of
interest of Shariah scholars in MLM practice might provide possible
explanation for the limited number of opinions by the scholars
regarding the matter.
The ‘Ustaz’ and Multi Level Marketing
I was also flooded with
zillion of questions regarding MLM and Shariah issues. Initially I
tried to shun away from the questions because there was just too many
MLM structures and this would make it difficult for anybody to provide
a clear Shariah injunction regarding the matter. In addition, there are
a lot of people who are currently involved in MLM and most of them,
seem to be ‘fanatic’ and very confident that the MLM structure and the
income generated from it is Halal.
In addition, there seems to
be a number of Shariah and Islamic studies graduates (the so called
Ustaz and Ustazah) that promote various products using these MLM
schemes. To add some spice and flavor to their promotion, these groups
would claim that MLM is halal and they would quote various proofs from
Al-Qur’an and Hadith that encourage Muslims to do business and improve
their economic condition. As a matter of fact, the ‘evidences’ quoted
by them is general in meaning and does not provide specific
verification of MLM and their pyramid scheme.
To be honest, there are quite
a number of people influenced by the campaign of these groups of ustaz
and ustazah. These people join the MLM schemes without any second
thoughts whether it is halal or haram just because is has been approved
by an ‘ustaz’. Therefore I would like to remind all the shariah and
Islamic studies graduates to be more prudent in giving out any
injunction and to carry out detailed analysis before promoting and
claiming that MLM is halal. The opportunity to make sky-high profit in
MLM scheme should not overshadow our opinion and the injunction we put
forward. This reminder is vital as there are a lot of people who
exploit the endorsement by the ‘ustaz’ to advocate their MLM. Al-Laith
bin Sa’ad said: "If the people with the understanding of halal and
haram reviewed this problem, they would not endorse it as there is an
element of gambling in it" (Narrated by Al-Bukhari, no 2346). Sayyidina
Umar al-Khattab r.a reminded us:
لا يبع في سوقنا إلا من قد تفقه في الدين
"Do not trade in the markets
unless you have full understanding about religion and trading."
(Narrated by Tirmidzi, no 487, p 129; Albani: Hasan)
I believe it is best to share
a general guide of Shariah issues in MLM so it could serve as a
reference to help the general public make proper decision before they
drown deeper into the quicksand of MLM. However, one has to bear in
mind that this general guide is not meant to condemn any specific MLM
brand or structure that exist either in Malaysia or overseas. This
guide only provides an overview and highlights of several Shariah
issues regarding MLM.
Definition of MLM
Generally Multi Level
Marketing (also known as network marketing) refers to an alternative
approach of conducting business that involves selling of goods and
services through a network of distributors. It involves multiple levels
of distributors known as upline and downline. The growth of MLM
network could involve vertical (up-down) expansion, horizontal
(right-left) expansion or a combination of both. (See All About MLM by
Benny Santoso, p 28)
MLM practices : Between Haram and Syubhah
MLM that employ these schemes in their operation is clearly prohibited (haram) or Syubhah in Shariah:
1) Inflated Selling Prices:
Some goods and services sold through MLM network are traded at higher
prices compared to its market prices just to ensure the MLM companies
enjoy a higher rate of return and are able to pay commission to their
distributors. This practice is not recommended in Islam and according
to some jurists this kind of contract is null and void. This practice
is known as ‘Gabhnun Fahisyh’. However, there are differences of
opinion regarding this practice. Some scholars say it’s permissible
(harus); some say it’s undesirable (makruh) while others say it’s
prohibited (haram). (Durar al-Hukkam Fi Syarh Majallah al-Ahkam, clause
no 356, p 369). Nevertheless, Prophet Muhammad SAW has indicated that
selling goods at inflated price to those who do not have adequate
knowledge regarding the pricing of goods is a form of oppression.
(Al-Qawaid, Ibn Rusyd, p 601)
2) Sales target as a pre-requisite for commission payment:
Usually, in addition to the membership fee, MLM companies would set a
minimum sales target for the upline if they would like to enjoy any
commission from the sales of their downline. If they fail to achieve
this target, their membership maybe terminated or they would not be
entitled to receive any commission although their downline has
transacted a large amount of sales. Every MLMs that has this kind of
pre-requisite would face some Shariah issues because this pre-requisite
is a form of oppression. A policy that states "You must maintain a
monthly personal sale, say RM500 in order for you to enjoy the
commission from your downline’s sale" involves a conditional sale where
the condition is set to the disadvantage of the member. This policy
implies a form of coercion.
Generally, commission that is
earned through sales of goods and services (like brokerage fee) is
permissible (harus) in Islam; this is the opinion of prominent Muslim
scholars like Muhammad Ibn Sirin, ‘Ato’ Bin Abi Rabah, Ibrahim
an-Nakha’ie and many more (Sohih Al-Bukhari ; Al-Musannaf, 5/242 ;
Mawahibul Jalil, 4/452 ). However, the commission in MLM and pyramid
schemes may convert to haram status if:
* Sales commission of the
network is tied to his/her personal sale. This condition raises several
Shariah constraints because it involves oppression, invalid conditions
and gambling like activities. A conditional contract like this results
in unclear task of the agent or broker. If he is only the broker or
agent, why should he be compelled to maintain certain level of sales?
This is an implied coercion stated subtly in the agency contract.
Therefore the nature of the agency contract is ambiguous (syubhah) and
thus contaminates the commission received.
* Commission originates from
an unknown downline because the network is too big. As a result, the
upline seem to enjoy commission without the need to put any effort.
This could be classified as compound brokerage (broker on broker on
broker). In my discussion with Syeikh Prof. Dr Abd Sattar Abu Ghuddah
(Main Shariah Expert in Islamic Finance at the International Fiqh
Academy - Kesatuan Fiqh Sedunia, AAOIFI, Dow Jones Islamic Index and
many more association), he pointed out that compound brokerage falls
under the category of eating up another’s property unjustly and has an
element of gambling in it. The main factor that contributes to this is
the fact that compound brokerage automatically implies that a portion
from the sales of the downline will be channeled to the upline.
3) No tangible product for sale:
Some MLM schemes only require the members to register and find more
downline without the need to sell any product. With each new member
introduced, the upline enjoy a portion of the registration fee of the
downline. The more new members, one could attract, the more bonus he or
she would enjoy. This is a form of Riba Nasiah and Riba Al-Fadl because
it involves trading of money for more money in the future.
The same rule applies for MLM
that does not have a product of good quality but only introduces a
product for the sake of fulfilling the sales requirement. For example a
product that only involves a web section in the Internet at inflated
subscription price that is of no benefit to the members. In some cases
the member does not even own a computer to utilize the web section. In
reality the member is not interested to buy the product in the first
place. He or she just wants to join the marketing network and earn
bonuses from it. The Standing Committee of the Saudi Arabia Fatwa
Council has classified buying bogus products as a mean to join network
marketing in order to earn bonuses as haram. (Fatwa Council Al-Lajnah
Ad-Daimah Arab Saudi no 15/192-193.)
4) Manipulation by MLM company:
Some MLM companies manipulate their product, coerce the member to use
their product or sell haram products. All these activities are cleary
prohibited (haram).
5) Two in one contract:
There are also elements of 2 in 1 contracts that is known as
"shafqatayn fi shafqah" or bay’atayn fi bay’ah: This type of contract
is forbidden by the Prophet SAW:
نهى رسول الله صلى الله عليه وسلم عن صفقتين في صفقة واحدة
"The prophet SAW prohibited
two sales in one (contract)." [Narrated by Ahmad, Al-Bazzar ;
Al-Haithami : The chain of narration from Ahmad is trustworthy
(thiqah); 4/84 ]
Two in one contract occurs in MLM due to several factors as below:-
Firstly,
the purpose of the initial membership fee is not clear - is it for the
purpose of becoming the member of the network or is it for the purpose
of buying the product.
Secondly,
after becoming the member of a network he or she is automatically
appointed as an agent of the company to recruit more members.
Combining these two factors,
the contract would fall in the category of two in one contract. The
first contract involves an exchange contract (‘Uqud Mu’awadat) where
the fee is exchanged with membership right or product acquisition.
However at the same time, another contract is executed - an agency with
fee (Wakalah Bil Ujr) contract - where the member is appointed as an
agent for the MLM to sell its product and recruit new members for a
return of commission. Two contracts - exchange and agency - are
executed within one contract.
The International Fiqh
Academy (Majma’ Fiqh Islami) has issued a legal verdict declaring that
PT Biznas (a MLM scheme) is haram. The verdict also ruled that the
commission paid is not like a brokerage fee because it involves
activities similar to gambling. (Refer to verdict no 3/24, 17 July
2003). In addition, Syeikh Salim Al-Hilali also released a verdict
prohibiting MLM. He said: "Many question has been put forward regarding
the popular business (MLM). Generally, it follows the pyramid scheme in
its marketing strategy where each member has to find a new member and
so on and so forth. Each member pays a fee to the company with the
objective to attain bonus. The more members one could attract, the more
bonus they would enjoy. Majority of those who join these companies are
motivated by the lucrative bonus offered and hope to get rich fast.
They are not concerned about the product at all."This type of business is pure gambling because:
Ø In reality, the
members of MLMs are not concerned about the product. They join the
marketing network only to attain instant profit via the membership fee
of new members.
Ø The actual price of the product is less than 30% of the price paid to the MLM company.
Ø The purpose of the
business is to develop continuous network of people. With this network,
large number of people at the bottom of the pyramid (downline) pays
money to a few people at the top (upline). In this scheme, no new
wealth is created, the only wealth gained by any participant is wealth
lost by other participants. Each new member pays for the chance to
profit from payment of others who might join later."
It is very rare to find MLMs
that does not incorporate the prohibited activities I have mentioned
above. Therefore, I remind all the Islamic unit trust and Takaful
agents to be cautious and not to fall into the realm of MLM. If you
still feel that MLM is halal after reading through all the prohibited
activities I have highlighted above, then one should ensure the minimum
level of Shariah compliance of the following:
1. Real sale of goods: The
products should have tangible benefit to the members or users like
health supplements of good quality and other goods. Therefore, goods
which have no tangible benefit, of low quality that do not meet the
requirements for a real sale of goods, naturally being used to hide the
pyramid scheme in MLMs and serve as legal tricks to avoid Shariah
prohibition. Therefore, the strength of a MLM should be based on the
product quality and not based on the ability to make large profit out
of new members fee.
2. The product is not gold or silver or currencies: Gold,
silver and currencies are ribawi items and should observe strict
Shariah rules that only permit spot transactions. Gold, silver and
currencies could not be sold on deferred basis because it will be
tantamount to Riba Nasiah.
3. Commission paid to each member is transparent: There
should not be any commission paid without effort. Therefore an upline
is only entitled to the commission of the downline whom he or she has
helped.
4. Commission is not based on number of new recruits: Commission
should be based on the amount of sales that one has managed to achieve.
This is important to ensure that the MLM focuses on real business and
is not a mere money game.
5. No sales target as a pre-requisite for commission payment: There should not be any form of implied coercion by setting this kind of condition.
6. Every upline should put effort to help their downline: Upline
should assist their downline by arranging for meetings, giving
motivation and explaining sales techniques to their downline. This is
important to ensure the upline is legally (from shariah perspective)
entitled to the commission received. If not, the commission received
may be categorized as ambiguous (syubhah) income. If the network is too
big and the upline does not even know the downline what else to offer
assistance, then why should the upline still attain benefit at the
expense of the new member? This would result in compound brokerage
mentioned above.
7. Does not utilize pyramid scheme i.e First In Rich Forever (FIRF) scheme: The
marketing plan should ensure that everybody has an opportunity to get
commission based on their performance and not according to First in
Rich Forever scheme. In FIRF schemes, those who join a MLM company at
its infant/early stage will always gain more as more members join
although the new member is able to sell/perform better than those who
join earlier. If it is a genuine business, a downline who performs
better than an upline should be able to make more profit than the
upline.
8. Disclosure of the commission system should be transparent and understandable: This is to ensure that there will be no fraud and the members could observe the commission payment easily.
9. Structuring of marketing plan based on partnership (musharakah) contract: The
best way to set up a marketing plan is based on musharakah where profit
and losses in the business is shared according to according to the
capital ratio. The parties should agree upon the profit sharing ratio
before entering into the contract.
Last but not least, I am aware that rulings regarding MLM are not yet concluded and are still open for discussions. Even Syeikh
Dr Abd Sattar Abu Ghuddah, during our discussion, pointed out that the
MLM issue is still new to him. It is difficult to find writings of
Middle Eastern scholars regarding MLM because MLM has yet to enter the
Arab countries massively. Therefore, it is the responsibility of the
South East Asian scholars to elaborate on this topic to provide the
general public with guidelines about Shariah issues in MLM. This short
writing is only a preliminary opinion intended to remind all of us
about the ambiguity or doubtness that is embedded in MLM schemes.
Readers should not be annoyed and irritated by the article. It is only
a reminder for those who are concerned about the legality of their
income and a forewarning for those who ponder upon the infinite life
after death. Wallahu ‘alam.
Kuala Lumpur, Malaysia (14 Zulhijjah 1427 H = 4 Januari 2007)
