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.

Me and Syeikh Dr Abd Sattar Abu Ghuddah (in the Middle) at Dallah AlBarakah Conference on Oct 2005

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)