From the Permanent Commitee in Saudi Arabia for Research and Fatwa
The type of business based upon a pyramid scheme – or “multi-level marketing” as it is often called – is unlawful. The real objective of such a business is to obtain the commissions earned from introducing new members to the company and not to earn profits from the sale of the products themselves. At a time when the commissions may reach into the tens of thousands of dollars, the revenue collected from the sale of the products might only be a few hundred. Any person of sense who is given a choice in such a scheme will obviously go for the commission.
This is the reason why companies of this kind, when promoting themselves, depend so heavily on showing the large volume of substantial commissions that they are giving out. They attract customers by the promise of large returns against the payment of a relatively modest initial sum that is often represented as the “price of the product”. The product this company is marketing, however, is merely a pretext to obtain commissions and to profit from those commissions.
With this being the true nature of the business, the Islamic ruling on it is that it is unlawful. The reasons for it being unlawful are as follows.
1. It entails the two kinds of unlawful interest:
a. Ribā al-fadl: the interest resulting from an exchange of like for like in an unequal manner
b. Ribā al-nasī’ah: the interest that is paid in lieu of credit.
The subscriber is paying a smaller sum at present in order to obtain a much larger sum of money at a later time in exchange for it. This is essentially an exchange of one sum of money for another sum of money of a greater value with a time delay. This is unlawful interest, as stated clearly by the sacred texts and agreed upon by consensus.
The product that is sold by the company is only a pretext for the real exchange that is going on. It is not intended in and of itself, and thus does not have any affect on the ruling.
2. It entails an unlawful degree of transactional uncertainty (gharar).
This uncertainty results from the subscriber not knowing whether or not he can obtain the required number of new subscriber to obtain his commission.
This pyramid scheme, no matter how long it lasts, will eventually come to an end. The subscriber is going into this pyramid scheme not knowing where he ranks in it; whether he will be in one of the higher tiers that will receive large profits or in one the lower tiers that will lose out.
As a matter of fact, the majority of the subscribers will be losers and only a minority will profit. Thus, loss in such schemes predominates, and this is the nature of transactional uncertainty. Here is a case where there is uncertainty between two outcomes, the most likely of them being the worst.
The Prophet (peace be upon him) forbade transactional uncertainty, as related by Abū Hurayrah who said: “Allah’s Messenger (peace be upon him) forbade business transactions determined by the throw of a stone and business transactions involving uncertainty.” [Sahīh Muslim (1513)]
3. It entails taking the money of others falsely.
It is essentially only the company that profits along with those who persuade others by way of deception to hand over their money to the company.
Allah says: “O you who believe! Do not devour your wealth among yourselves falsely.” [Sūrah al-Nisā’: 29]
4. It entails deception and fraud.
The company deceives people by misrepresenting its product as its business, when the sale of the product is not its true goal. It also engages in deception by holding out the promise of substantial commissions to would-be subscribers, when such large commissions are for most subscribers not possible to achieve. This is unlawful deception.
The Prophet (peace be upon him) said: “He who cheats us is not one of us.” [Sahīh Muslim (101)]
This business arrangement cannot rightly be described as a brokerage agreement
A broker receives a commission for the sale of a real product, while there is no real product being sold here. In fact, the subscriber in a multi-level marketing scheme is actually paying for the right to market the product.
Also, with a real brokerage contract, the purpose behind it is actually to sell the product, whereas in multi-level marketing, the purpose is to sell memberships and not the product itself. This is why a subscriber strives to market to others the right to market to others, so that they can in turn market to others the right to market to others ad infinitum.
In a brokerage agreement, by contrast, the broker is out to get the product sold to someone who actually wants to purchase it.
These commissions, likewise, cannot be described as gifts or bonuses
Even if we were to classify these commissions as gifts, Islamic Law would view them as unlawful gifts. Not all gifts are permitted by Islamic Law. For instance, the gift from a debtor to his creditor is considered usury.
This is why `Abd Allah b. Salām, the eminent Companion, said to Abū Bardah: “You are in a land where the practice of interest is rife. Therefore, it someone is in debt to you and gives you a gift – say, a bail of straw, a load of barley, or a pile of feed – then that is interest.” [Sahīh al-Bukhārī (3814)]
A gift takes the ruling of the purpose behind it. For this reason, when a Zakāh collector came to the Prophet (peace be upon him) and said: “This is for you and this is what was given to me as a gift.”
The Prophet (peace be upon him) responded to this by saying: “Had you been sitting at home with your mother and father, would he have come to you and given you that gift?” [Sahīh al-Bukhārī (2597) and Sahīh Muslim (1832)]
The commissions given by the company in a pyramid scheme are given only on the basis of membership. Therefore, no matter what name we choose to give it, it will not affect what it actually is or the legal ruling that it takes.
The Permanent Committee in Saudi Arabia for Research and Fatwā
Sheikh `Abd al-`Azīz Āl al-Sheikh
Sheikh Sālih al-Fawzān
Sheikh `Abd Allah al-Ghudayān
Sheikh `Abd Allah al-Mutlaq
Sheikh `Abd Allah al-Rakbān
Sheikh Ahmad al-Mubārakī