By Mufti Faraz Adam
and
Suleman Muhammad Ali, Head of Products Muzn Islamic Bank
A lot has been written on dropshipping and the Shariah concerns about it. Yet, there is still confusion and a lack of clarity on dropshipping. This article seeks to propose a valid Shariah interpretation and the Halal way to perform dropshipping without having to alter and amend the structure too excessively, keeping it commercially viable and practical. This article addresses the following:
- The conventional method of dropshipping
- The Shariah issues raised against dropshipping
- An alternative Shariah compliant interpretation and structure of dropshipping
- The typical method of dropshipping
To break it down, here’s how the dropshipping typically operates:
- The dropshipper “stocks” products on their website or online marketplace.
- The dropshipper doesn’t actually hold the inventory of these products, they are held by the supplier or wholesaler (who could be anywhere in the world).
- When a customer orders a product from the dropshipper’s website, the dropshipper receives a notification. The order is forwarded simultaneously to the supplier, either manually (by the dropshipper) or automatically.
- The customer pays the retail price to the dropshipper. Whilst the dropshipper pay the suppliers’ wholesale price, and the rest is profit for the dropshipper. These products may cost £1 per unit from the supplier, while the dropshipper lists them at £3 each (making a profit of £2 from the sale).
- The supplier fulfills the order and ships it directly to the customer.
- Shariah issues of dropshipping
The Shariah non-compliant issues in dropshipping are raised at two levels:
- Retailer’s transactional structure with customer
- Bearing of risk and possession of the retailer
If the dropshipper is “selling” the item to the customer, then that is not permissible as he does not own the item being sold. The goods are owned by the manufacturer and directly sold to the customers. There is no point in the process where the ownership and the possession of the goods passes from the manufacturer to the dropshipper. Hence to categorize the concept of dropshipping as a sale contract will make the structure non-compliant since it is not permissible in Shariah to sell something that one does not own. Most of the Shariah opinions which have declared dropshipping as non-compliant have viewed it as a sale contract where the dropshipper does not take possession of goods.
People might argue to structure the concept of dropshipping on the basis of Salam or Istisna. At first instance, this seems to be a plausible solution since both contracts allow the seller to sell goods that he or she does not own. However, while the execution of Salam and Istisna sale contracts is allowed prior to ownership and possession, their fulfillment also requires that the ownership and possession of the goods must first pass on to the seller (i.e. the dropshipper) before passing on to the end customer.
A major litmus test of possession in terms of Shariah is whether the dropshipper bears any risk of the sale item arising from its ownership and possession. In most cases, if not all, the supplier typically bears the responsibility, liability, and risk of the asset until it reaches the end customer. As such, a Salam or an Istisna transaction is not rendered in a Shariah compliant manner, both demand that the seller acquires possession – whether physical or constructive and the risks that come with it – before the onward delivery to the end-customer.
If we try to interpret the dropshipper as the Wakeel (agent), Ajeer (employee), or paid agent of the manufacturer the problem that arises is that the current form of a contractual arrangement between the parties does not include any form of Ujrah-based employment obligations such as the scope of work, hours, etc. More importantly, there is no form of fixed remuneration agreed between the parties, with the dropshipper only making an earning in case he is able to sell the goods at a certain price. This brings in an excessive form of Gharar or uncertainty with regards to wages of the agent, thereby making the structure of Wakeel (agent), Ajeer (employee), or paid agent redundant when it comes to fulfilling the demands of a dropshipping model.
- An alternative Shariah compliant interpretation and structure of dropshipping
Dropshipping is a method of retail where the store never physically or constructively owns the products it sells. Instead, when the dropshipper sells one of the products it stocks on its website, it instructs a third-party supplier who then ships the item directly to the end customer.
Hence, the online dropshipper never actually sees or holds the item, nor does he ship the item. They are effectively advertising it for the supplier and marketing up the price of the product so they can make a profit.
Given the fact that dropshipping market is growing, it has come up as a viable business option for many home-based entrepreneurs, especially during the pandemic. Discarding it as non-compliant would make it inaccessible for the Muslim community as a potential source of income.
We feel that a lesser-known contract of Ju’ala seems to better fulfill the requirements of dropshipping business model. Ju’ala is somewhat of a reward contract. It is a contract in which one of the parties (the Ja’il) offers specified compensation (the Ju’l) to anyone (the ’Amil) who will achieve a determined result in a known or unknown period.
If we consider the dropshipping structure as a Ju’ala for the dropshipper, this would mean that the manufacturer is the offerer (Ja’il), and the dropshipper is the worker (‘Amil). The Ju’ala contract does not require a specific employment contract to be executed between the parties. It is more like a standing offer from the offeror (Ja’il) to give a reward to anyone who fulfills that offer. For example, a person may announce compensation for anyone who brings his lost property or recovers his debts from a defaulting debtor.
Hence the compensation in Ju’ala is linked to achieving the desired result rather than doing the man-hours or specified tasks which is the case in Ijarah. For this reason, neither the stipulation of fixed wages nor a fixed amount of work is a requirement in Ju’ala. If the result is not achieved there is no compensation.
In dropshipping, the supplier is effectively making a standing offer to anyone to find customers and sell his goods at a price that is over and above his minimum floor price with compensation being specified as any amount over the minimum selling price. In case this desired result is achieved, the manufacturer makes the compensation (Ju’l) from the selling price itself, even though this is uncertain. The AAOIFI Sharia Standard on Ju’ala permits the compensation to be from the subject matter even though it is uncertain. As such, the portion of the sale proceeds that the dropshipper keeps over and above the selling price satisfies this requirement from a Ju’ala perspective.
Therefore, the Ju’ala structure means that the retailer is not selling the item themselves, rather they are trying to find customers for the supplier, and are permitted to keep whatever is over and above the retail price of the supplier for themselves.
Up until now, there hasn’t been any worthwhile practical implementation of the contract of Ju’ala when it comes to Islamic Finance. However, with new tech-based business models coming up we feel that there is a need to channel our thinking away from commonly used Islamic financial contracts and employ other solutions available in the rich sources of Fiqh al-Mu’amalat which may be more suited to the changing tech-based Mu’amalat landscape. In this regard, we feel that the contract of Ju’ala holds a lot of promise when it comes to the business of dropshipping.
