Shariah Compliant Multi Level Marketing: Issues And Recommendations

Abstract: Multi Level Marketing (MLM) is a new concept in Islamic transaction. However, from the aspect of consumerism, various issues have arisen. Hence, there is a need of requiring correct approaches and immediate solutions to resolve these issues. Be that as it may, Islam as a comprehensive religion has the solution on all aspects of life, including matters of MLM. This paper will focus on controversial syariah issues regarding MLM such as having two akads in one transaction, excessive pricing, bonus and others. It would also provide guidelines on contemporary Islamic muamalat system, thus assisting future Muslim consumers in differentiating, as well as choosing MLM products that are shariah compliant. Recommendations of a Shariah compliant MLM model would also be included in this paper.

Shariah Compliant Multi Level Marketing: Issues And Recommendations[1]

Najahudin Lateh

Mardhiyyah Sahri

Centre for Islamic Thought and Understanding (CITU) UiTM Shah Alam

INTRODUCTION

The Multi Level Marketing (MLM) system had garnered a lot of attention be it from the consumers or from the sellers themselves, i.e. companies and agents. This system has a lot of advantages since it does not require a lot of capital as modal whereas the return in the form of incentives, bonus or commission are quite high. The uniqueness of this system had made the companies and individual distributors alike compete among themselves to create, produce and market their products and services to the consumers. The MLM can be said to be an alternative strategy for business marketing rather than depending on conventional marketing strategies such as the normal market, retail or wholesale.

Be that as it may, issues arose as to how far this type of transaction is compliant to the Syariah principles and the Islamic muamalat. The contract and transaction from the Syariah perspective are not detailed and are unknown to the public, especially the Muslims. The lack of writings and facts on the Syariah evaluation of this transaction has made it worse. Hence, this issue must be highlighted and given attention by the Muslims as Islam emphasized  on the responsibility of its people in learning and acquiring knowledge especially in muamalat matters. Saidina Umar al-Khattab RA once said : “Do not let one of you sell and buy (do business) in our market, unless he has acquired the religious knowledge (hukum) on it” (Riwayat al-Tirmidhi)

THE CONCEPT OF MULTI LEVEL MARKETING (MLM)

Literally, the term ‘MLM’ comes from the Latin, which are (i) ‘multi’ which means ‘more than one’ or ‘plural’, (ii) Level which means ‘scale of grade or degree’; and (iii) Marketing which means ‘the action or business of promoting and selling products or services.’. Hence, MLM means ‘promoting and selling products or services through more than one scale of degree’. Technically, MLM is a method to sell directly to the customers via the networks of the distributors (Kearney & Bandley, 1991).

Jabatan Kemajuan Islam Malaysia (JAKIM) defines MLM as a form of marketing where the company will appoint an individual as a member or distributor of the company’s goods. This person will appoint other individual/s (downline) to create his own network in selling the goods. Every member or distributor will receive commission, bonus or incentives from his personal sales as well as from the sales of the member or distributor that are below his level in his network. (http://www.islam.gov.my/muamalat/glossary?page=5)

Generally, MLM is a method of product marketing or direct service done by distributors of different levels. This marketing network does not requires advertising and furthermore, the return would increase alongside the effort put in the distributiom and sale of the product. The more effort you put, the higher income you will receive.

MLM can also be known as a business marketing strategy done through various levels, commonly linked with terms such as upline and downline. The network used may be vertical, horizontal or could  be a mixture of both.  MLM has an operational system or working component of its own,. According to Clothier (1994), the MLM working system consist of sponsoring, signing, distribution, retailing and networking.

THE ELEMENTS OF A SHARIAH COMPLIANT MLM

A Syariah compliant MLM business transaction would be one that complies to the essence of an Islamic muamalat contract. According to the Mesir Fatwa Centre (2007), MLM is a form of new akad that combines two different types of akad namely a sell and buy akad and al-Ju’alah.A sell and buy akad happens between the company and the buyer who would later becomes the distributor by fulfilling the additional terms and conditions laid down by the company. Similarly, a sell and buy akad also takes place between the distributor and the customer who bought fhe product. These sell and buy akad are done by mutual consent (at-taradhi), without elements of force or manipulation.Apart from that, the akad also has other specific conditions, namely:

  • Goods. The goods/products sold must be in existence during the akad, known to both parties of the akad, is a legal property in the eyes of Syariah, owned by the seller and able to be given away.
  • Sighah. As for the sighah (utterance of offer and acceptance), both parties to the akad must manifest through signs or reactions that they agreed to the akad and they mutually agree to the transfer of ownership of the goods/property in return of benefits.
  • Parties to the akad. Both parties should have full capacity to conduct the akad, mutual consent and authority upon the subject matter of the akad either as the owner or a representative of the owner.

The Akad al-Ju’alah on the other hand, is a gift akad, tied to a work or role. It involves four pillars namely:

  • Al-Ja’il :One who offers the gift which is the company that manufactures the product and provide services
  • Al-Maj’ul lahu :One who is being offered the gift,which is the distributor or the agent
  • Al-‘Amal  :The work or role that would become the condition to obtain the gift, that is to do the marketing and sale of the product and to get new customers or distributors for the company
  • Al-Ju’l:The gift/bonus which is a specified percentage of  the price of the product or merchandise.

Al-Zuhayli (1986) listed the conditions al-Ju’alah as follows :

  • Parties to the akad must be competent and have full capacity to be involved in an akad
  • Payment must be from a known sum of harta (prop?); and
  • The returns/benefits should be known and should be beneficial from the Shariah

The general hukum for MLM is recommendable, however, it may become haram through the existence of certain elements. This is clear from the fatwa of the Mesir Fatwa Body, al-Lajnah al-Da’imah li al-Buhuth al-Ilmiyah wa al-Ifta, Saudi Arabia and Majma’ al-Fiqh al-Islami, Sudan upon several MLM companies. The elements that make it haram include matters that are against the muamalat contract or the principles of Islamic transaction including being non-Shariah compliant by having elements such as : riba, gharar,gambling,violation of the pillars and conditions of the contract,injusticeness,fraud (tadlis), trickery (taghrir) and the usage of the Pyramid Scheme or Money Games.

THE SHARIAH ISSUES ON MULTI LEVEL MARKETING

  1. Two Akad in One

The existence of two akad in one, is called shafqatayn fi shafqah or bay’atayn fi bay’ah from the fiqh perspective. This is prohibited in the Islamic muamalat, based on the hadith : “Rasulullah SAW prohibits two (akad) buyings in one (aqad)” (Riwayat Ahmad)

What is prohibited by this hadith may occur in MLM through the acts of registered members who have two different muamalat akad in one akad. This happens when the distributors registered themselves in an MLM  company and paid a sum of money for the registration fee as well as the products of the company.At the same time, they would become the agent to the company to sell the products and furthermore, to search and recruit new members as downline. For example, an MLM company opens its membership to a new member who brought its products with a special price with the condition that he becomes the representative to the company by not only selling the products but also act as an agent to recruit new members with a certain comission from the sales of the new members.

Hence, the fee paid cannot be ascertained whether it is to buy the product or to buy a position in the organizational structure of the company. When this happens, two contracts of a common akad (akad lazim) can be said to have been conducted namely akad mu’awadat maliyah (financial exchange) when buying the product or becoming the member and akad wakalah (representation or agency) when selling the product and finding new dealers with certain incentives as an upline.

The combination of two akad in one in the example given above involves two common akad which are mu’awadat maliyah and wakalah. Generally, this type of muamalat could be avoided from becoming haram or syubhah by creating two totally different akad that would separate them both from becoming one akad. The combination of the akad also would not be of any problem if only one of it is not a common akad.

  • Excessive Pricing

Another issue in MLM is that the products are sold with an excessive price.For example, some MLM company sold coffee for RM100.00 a box whereas the normal market price for it is just around RM20.00 only.To make the matter worse, the quality and the taste of the coffee is either the same or worse than the normal coffee. Furthermore, some company purposely increase the price of their products in order to give bonus or commission to their whole distributors.

This matter falls under gabhnun in fiqh perspective which is one of the forms of fraudulent pricing that can make the akad void. Gabhnun from the fiqh perspective can be divided into two yasir and fahisyh. According to Ibn Qudamah (1981), this happens when the buyer buys with a price that is not the normal market price after being forced into it and the transaction is hastened by the seller. The views of the mazhab differs, ranging from recommendation,reprehensible to prohibited.Ibn Rusyd (1985) opined that ghabnun which the price is above one third of the normal market price is prohibited.

  • Comission and bonus

Generally, commission and bonus in MLM is recommended. The Mesir Fatwa Body (2007) explained that … ‘we are of the opinion that there is no prohibition in conducting this type of muamalah (MLM) and there is also no prohibition in giving (commission/bonus) of certain percentage to someone of which it becomes the cause to the distribution (of the product) even if it is done indirectly because the reason that makes him qualify for the bonus still remains and that is sufficient to make the hukum in giving the bonus to him as recommendable’.

This clearly shows that the MLM companies act of giving commission or bonus to the distributors based on the percentage of the sales of the downlines is recommended.Commission and bonus are wages or rewards given by the company to the distributor or upline that have done their jobs and have contributed by selling the products, promoting the company and recruiting new members. The commission from the sales of the downline is a must since they have put in their efforts and guided the new members so that they become successful in their sales as well as helped in building the organization of the company. This is done by the upline through continuously giving motivation, discussion, meeting, planning, explaination and other methods to the  downlines.

Be that as it may, the commission or bonus given must be guided by the Shariah rulings and  must be in line with the muamalat concept such as  ujrah (wages), al-Ju’alah, hibah, samsarah and others. For example, it must be in accordance with the concept of al-Ju’alah that has been stated before. That is, the commission is to be given upon the execution of a specified work that has been agreed upon. The bonus or commission given must follow the conditions of al-Ju’alah such as it is given based on the work or benefit contributed by the distributor in helping the company. The MLM company should also declare specifically the amount of bonus that would be given to the distributors if they have carried out the specified jobs described.

Apart from that, there are other Islamic muamalat principles that should be followed. For example, the bonus must be given out of the profit of the sales or the company’s contribution and not from the fees that has been imposed to the members. It is also important to note that the product sold must be permissible (halal) and does not contain prohibited (haram) elements such as riba, gharar, fraud and others.

The MLM company must be careful in giving out the commission or bonus by avoiding elements of doubt (syubhah) as below:

  • Commission gained from the sales of downline that are of very distant levels such that they are unknown and no guidance was provided to them. This can lead to unlawful gain as no effort has been put into it thus exposing oneself to acquiring unlawful property. In MLM, it would not make any sense and thus raise doubts (syubhah) if the upline of the first level receive commissions from the percentage of sales done by the downline of the 100th level without giving any capital, contributing any amount of work or providing any guarantee upon the downlines.
  • Commission or bonus would only be given upon a certain amount of personal purchase by the upline. For example, the MLM company would only give a percentage of the sales of the downline if the upline himself managed to sell 1000 units in a month. His eligibility to claim the commission would be lost if he fails to reach his target even though he had successfully sold 999 units. Although basically this condition is recommended by the concept of al-Ju’alah, however, it entails the elements of force and gambling. This happens when the upline is indirectly forced to purchase the unit in order for him to be qualified in receiving the commission. It also can be said to have elements of gambling when he has to put forth his money in purchasing the company’s product in order to acquire a higher return. Thus, the commission is doubtful (syubhah) in nature as it cannot be ascertained whether it is given due to the effort that he has done by providing guidance to the downline, or it is given due to the act of the  upline purchasing the product in order to fulfill his eligibility for the commission.
  • MLM and the Pyramic Scheme or Money Games

Pyramid scheme is system where the downline pay to the upline. Every new member must pay the registration fee and the sum paid would be given to the upline or the owner of the scheme, the downline then would find another new member beneath him and gain profit from the sum the new member paid to join the scheme. This is the situation of pyramid scheme and money games of which it gave more emphasize on the membership fee and not the products of the sale.

Registering and paying fees in this kind of business is not to sell and purchase products but to find downlines. Uplilne will receive a percentage from the membership fees of the downline and not the profits of the sale. The more the downline are, the more commission the upline will receive. This type of business has elements of riba, gambling and gharar fahish since it gambles money in order to receive more money in the future of which this return cannot be ascertained.

Even if there are products, they are superficial and act only as to trick the eyes of the public and the laws. This is because the aim of the business is not to sell the products but to gain more membership fees. Even more so, the product that they use would normally be low of quality and excessive in price. Sometimes the product would simply be in a replicated form of the website or an autosystem of a line up the downline beneath. This again, clearly shows the intention of becoming a member is not to purchase the product but to have a position in the network so that one can profit from the members lined up below him.

Since the operational system and organizational network of the MLM is quite similar with the pyramid scheme, there are views that say that both are of the same and therefore both are haram. Moreover, there are some who alleged that MLM is totally haram by basing solely on the fatwa al-Lajnah al-Da’imah li al-Buhuth al-Ilmiyah wa al-Ifta, Saudi Arabia whereas the truth is that the fatwa is aimed to MLM companies that run their business by the pyramid scheme or money games.

Hence the differences between MLM and the pyramid scheme or money games must be made known. This is because some companies run the business of money games but uses the MLM name as a cover up, thus misleads and creates confusion among the consumers.

The Consumers Association of Pulau Pinang listed the characteristics of a  pyramid scheme as below :

  • Low quality products with high prices and the new distributors must spend their money on the inventory of surplus goods;
  • Expensive membership fee and commission to each member who manages to attract new members
  • A policy of no return  of money and no written contract between the company and distributor;
  • Have little concern as to the retail sales and income is generated through the expansion of memberships under the distributors;
  • Imposing the members to compulsorily attend expensive training sessions; and
  • Made up promises of great return and immediate success that are unrealistic.

Thereafter, it is clear that MLM and the pyramid scheme or money games are different. MLM is a marketing system of direct selling from the company to the consumers through multi level distributors. Hence, the basis of MLM is marketing. This is different from the pyramid scheme as the basis of it is the play of money and not the marketing nor the product.

One should also note that the profit gained through MLM is by the sale of products by the distributors. This is different from the pyramid scheme where the profit return is through the success in recruiting new members through the pyramid system and through the registration fees paid by the downline. The bonus or commission are also given from the downline fees and not from the sale of the product.

Perhaps there are many consumers out there who have the perception that MLM and pyramid scheme/money games are similar as both have products.But the reality is that the product in the latter is only meant to deceive the public and to evade the law. The product is not the aim in the pyramid scheme/money games but rather the real aim is to collect as many downlines and registration fees from them. This would ultimately bring benefit to those who enter the scheme earlier as they would gain the most in comparison to those who are below. Those in the scheme would then manipulate this system by claiming that there would be higher return to those who register early, thus indirectly compelling new members to do so.

RECOMMENDATIONS FOR A SHARIAH COMPLIANT MLM

Having discussed on the factors that influences the validity (halal) as well as invalidity (haram) of the MLM direct selling business, one would like to emphasize on the importance of ensuring its compliance with the Shariah.

Thus, several recommendations are highlighted here, so that all concerned and related parties to the MLM business, be it the manufacturers, distributors or consumers could further improve themselves and ensure that the business that they venture into are in accordance with the Islamic muamalat.

The recommendations for a Shariah compliant MLM are as follow:

  • The MLM company must ensure that the corporate culture, manufacturing activities, marketing operation, account system and others must be in line with the Islamic rulings.
  • The MLM company should have a Syariah Advisory Panel that consists of Islamic scholars as well as muamalat intellectuals and those who are well versed in the Islamic economy to monitor the operations of the company and its marketing plans.
  • The contract or akad in the MLM transaction must comply with the pillars and conditions of the Islamic muamalat such as using the sale contract, musyarakah (partnership), ujrah (wage) and others.
  • The aim of the company is for business through sales of the product or genuinely offered services and not a gimmick or trickery in order to cover up the real aim which is to collect profit through money games.
  • The products of the MLM company must be halal and beneficial in the eyes of the Shariah, and not something which is haram or can bring harm or expose oneself to doubtful matters (syubhah).
  • The MLM product does not involve the sale of gold or silver through installments or debt as it would then be considered as a form of riba’.
  • The MLM product must be presented in a clear form without hiding its defects or its weaknesses and making the consumers unaware of such defect.
  • The MLM transaction must not be involved with haram elements such as riba, gharar atau gambling.
  • The MLM transaction must not be involved in manners that are prohibited in muamalat among society such as cheating, deceiving, causing injustice, monopoly of the product and extorting the consumers.
  • The price of the MLM product should not be too high that it results in a mismatch with the quality or the benefit that the consumer would gain especially when comparing the same product with the market price.
  • The price of the MLM product should also not be exploited and sold to naïve consumers with an excessive price as they are unaware of the real value of the product in the market.
  • The MLM marketing plan does not have elements of injustice and exploitation that gives the most gain to those who enter into the business earlier than those who registered later.
  • The MLM marketing plan must also ensure the rights of all the distributors in gaining profit and having said so, by right even the downline can gain more profit than the upline if he sold more products.
  • The MLM marketing plan must be an Islamic muamalat contract like selling products or offering services and it should not consist of money games, pyramid scheme or quick rich scheme.
  • The membership fee of the MLM company is considered as the administration fee or payment for the information and plans created by the company and it is not to be used as a profit maker or making a business out of the membership fees.
  • The membership fee of the MLM company does not compel the members to follow unreasonable, non-Shariah compliance and immoral conditions that exist during the akad of the contract or afterwards.
  • The members or distributors are given the freedom to discharge themselves from the contract and are not imposed with unreasonable and invalid penalties.
  • The bonus and commission of the MLM must be clear by pre-determining the ratio of the profits of the distributors or upline during the contract.
  • The bonus and commission of the MLM must not come form the membership fees per head but must be from the profit and the sales value.
  • The distribution of the  bonus and commission of the MLM must reflect the efforts of the respective distributors in marketing or promoting the company to new members and it must not be based on the higher position of the upline.
  • The distribution of the bonus and commission of the MLM must be transparent and fair and does not create any injustice to the downline. For example by the upline simply reaping off all of the efforts done by the downline in marketing without putting in a dime of effort in helping the latter.
  • The eligibility to obtain bonus and commission in MLM does not involve elements of force or coercion. For example by inducing the upline to purchase himself a certain sum in order for him to be eligible for the downline’s commission. However, a transaction that lays down the condition of a minimum sale per group done under the al-Ju’alah principles would be deemed valid.
  • All the operation and activities of the MLM sale must be in compliance with the rules and laws of the country such as the Direct Selling Act 1993.

CONCLUSION

Although MLM is a system created in a non-Islamic environment, alas it can be suited to adhere to the Islamic principles and thus avoid elements that are prohibited. Issues that arose, be it previous or current ones must be analyzed by using the Al-Quran, Sunnah as well as ijtihad of the Muslim scholars as the tools in ensuring that it is something positive and inline with the Shariah rulings. With the cooperation of all parties, the Shariah compliant MLM system can become the main alternative to the existing system and could one day become a key player in enhancing the marketing of the Muslim products. Thus it is obligatory for us, be it the government, companies, distributors, consumers or the public to trace back the path to follow the Islamic muamalat system in all aspects including in issues such as MLM .

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Websites

http://agustianto.niriah.com (Dr. Agustianto)

http://www.dar-alifta.org (Lembaga Fatwa Mesir)

http://www.dsam.org.my (Direct Selling Association of Malaysia)

http:// www.e-fatwa.gov.my (Portal Rasmi Fatwa Malaysia)

http://www. ilmudanulamak.blogspot.com (Ahmad Adnan Fadhil)

http://www.islam.gov.my (Jabatan Kemajuan Islam Malaysia)

http://www.kpdnkk.gov.my (Kementerian Perdagangan Dalam Negeri, Koperasi dan Kepenggunaan)

http://www.marketingpower.com (American Marketing Association)

http://www.najahudin.com (Najahudin Lateh)

http://www.zaharuddin.net (Zaharuddin Abd Rahman)


[1] This paperwork presented in International Conference On Islamic Economy And Business (ICIEB) 2012, 29 June – 1 July 2012 at A’Famosa Resort Hotel, Melaka