Shari’ah Issues in Multi Level Marketing

Realities of MLM Business:

1.     “MLM is a sales system under which an agent (or salesperson or distributor) of a company receives a commission on his own sales and a commission on the sales from each person he convinces to become an agent. First a person becomes an agent of the company by buying a product of the company and registering as its member; (or just registering as its member without buying any product). After that each agent has to sell the company's products or services to other individuals and recruit those as agents to sell the company's products or services. Each new person the agent gains are asked to bring his own recruits. The result is that under an agent a hierarchical substructure gets developed known as a down line. Each distributor gets sales commissions on his or her direct product sales. He or she also makes a commission on the sales of the distributors in their down line according to the method of a pyramid scheme.”

2.     “MLM businesses are fundamentally 'pyramid schemes. Originally, what happened in a pyramid scheme is that first you buy a form and become a member of the company. Then, you can begin selling forms to others. If you sell two membership forms, you get half of the money (value of one form) and pass above the rest half (to the one who sold you the form). Likewise, if the two people you made members, sell forms to four new members, they get half of that (that is, value of two forms), and pass above to you the rest half (value of two forms). You will get to keep half of that (that is value of one form) and pass above half (that is value of one form). So even if you (1^st person) don't do anything more, but those down your line are good marketers, you will continue to reap in money, until they are exhausted - when they cannot find anyone else to sell forms.

Due to legal problems and suspicion of people that they were not being sold anything of value, they started selling some products along with the memberships. So, if the membership used to cost US Dollar 1,000, they now sell a 'dinner set' (or bicycle, or something else) of US Dollar 2000 and membership, together for US Dollar 3,000. The 'profits' is 'shared' like before.”

The Answer:

Regarding the MLM, we need to observe the reality of MLM and the Shari’ah rules governing the means of ownership, the reality of contract in Islam etc.

Before that, let us examine the following two general two issues:

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).

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)

These two hadith is best to share a general guide of Shari’ah issues in MLM so it could serve as a reference to help the general public make proper decision who makes decision without knowing.

Problem No 1:

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. Alternatively whether the buyer becomes actually a broker, commission agent or employee being hired by the firm. In fact the Shari’ah rule governing the determination of proper wage with specific and well as general contract is different. Therefore in reality it is not just two in one, rather multiple in one contract, clearly violating the rule of Shari’ah.  

·         Secondly, after becoming the member of a network he or she is automatically appointed as an agent of the company to recruit more members.

·         Thirdly, once the down line makes sales or becomes member by buying a product the up line receives a part of commission. This is clear presence of two in one contract. 

Problem No 2:

If we define the agent of MLM as Brokerage in Shari’ah term (Samsara) or Commission agent (Dalala) in both cases we find that there is a clear violation of Shari’ah rules by what the current practice of MLM is.   

In case of Brokerage the person is not allowed to talk excessively about the product since it may fall into falsehood which is not allowed in Islam. This is in most case a reality with MLM. Abu Dawud, in his Sunan, related that Qais ibn Abu Ghurza al-Kanani said: “We used to buy the Awsaq (loads or freight) in Madinah and call ourselves brokers. The Messenger of Allah sws came and called us with a name which was better than ours. The Messenger of Allah sws said: “O you merchants, trading is usually blemished with foolish talk and swearing, so blend it with sahadah.”

Moreover, when Prophet sws has allowed the brokerage, he clearly has said that, “Deceit is Hellfire and whoever performs any action not according to our command, it is rejected”. As we know that, In case of MLM, deceit is a normal phenomenon in case of buy and sale in most case, thus it is not permitted. In case of commission agent the agent is not allowed to take commission from both sides of the contract, which is the case for MLM.

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 and thus contaminates the commission received according to Shari’ah.

·         Commission originates from an unknown down line because the network is too big. As a result, the up line seems to enjoy commission without the need to put any effort. This could be classified as compound brokerage (broker on broker on broker). All scholars pointed out that compound brokerage fall 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 down line will be channeled to the up line.

·         No tangible product for sale: Some MLM schemes only require the members to register and find more down line without the need to sell any product. With each new member introduced, the up line enjoys a portion of the registration fee of the down line. 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. This is Haram according to number of Fatwa issued in this regard.

Problem No 3:

More over there are other MLM practices ranging from clearly prohibited (haram) to ambiguous which again is prohibited in Shari’ah.

·         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) which therefore becomes Haram.

·         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 up line if they would like to enjoy any commission from the sales of their down line. If they fail to achieve this target, their membership maybe terminated or they would not be entitled to receive any commission although their down line has transacted a large amount of sales. This violates the clearly the Shari’ah rules regarding hiring an employee with specific or as well as general condition since Islam prohibits the fixing of wages in case of hiring on the basis of price or the value of the works, rather Islam bases the wages or compensation [salary] based on the effort the person gives, which may not fulfill the MLM company’s target. Every MLM that has this kind of pre-requisite would face some Shari’ah issues because this pre-requisite is a form of oppression. A policy that states "You must maintain a monthly personal sale, say US Dollar 15000 in order for you to enjoy the commission from your down line’s sale" involves a conditional sale where the condition is set to the disadvantage of the member. This policy implies a form of coercion, which cannot be considered as valid sales.

Indeed Allah knows the best. Ameen