Business Deal of a Well-known Company

Islamic Rulings on Trade

Business Deal of a Well-known Company

Mufti Abu Muhammad ‘Ali Asghar ‘Attari Madani

Q: What do the scholars of Islam say regarding the following matter: There is a manufacturer that works on a “cash up front” basis, unwilling to sell goods on credit. However, there is a well-known superstore that needs the goods on credit. In order to solve this problem, they have both agreed to adopt the following strategy:

An individual will act as a distributor, whereby he will purchase the goods from the manufacturer and pay for them, taking possession of them (no invalid condition has been set for the distributor by the manufacturer). The distributor will appoint the manufacturer as his sole agent, so that the manufacturer can sell the goods to whomever it wishes. For example, the manufacturer, acting as an agent, will then sell the goods of his distributor to the superstore on credit for 3 months. After 3 months pass, the agent receives payment from the superstore, which the agent (manufacturer) then passes on to its distributor.

I have the following questions:

1.   Is the above-mentioned method permissible according to the Shar’iah?

2.   If the superstore incurs a loss, or is unable to pay the agent, who will be responsible for the loss; the agent (manufacturer) or the representee (distributor)?

اَلْجَوَابُ بِعَوْنِ الْمَلِکِ الْوَھَّابِ اَللّٰھُمَّ ھِدَایَۃَ الْحَقِّ وَالصَّوَابِ

A: The scenario mentioned in the question is permissible; there is no harm in it. This issue comprises of three separate matters:

1.   The distributor purchased goods from the manufacturer, and took possession of the goods after paying for them. This transaction was complete, and no impermissible action took place, as it is permissible in Islamic law to buy and sell goods.

2.   After purchasing and taking possession of the goods, the distributor appointed the manufacturer as his agent to sell them. The manufacturer then sold the goods and gave the money to the owner; this is also permissible. There is nothing impermissible involved in this, as it is permissible in Islamic law for a person to sell their goods via an agent.

3.   It is also permissible for the manufacturer to sell the goods on credit to the superstore and then give the payment to the owner after receiving it. This is because it is permissible for an agent to sell goods and transfer the money to the owner after taking payment. It is also permissible for the agent to sell the goods on loan.

Thus, if the three above-mentioned matters are permissible individually, then they are also permissible when found together and contain nothing that will render them impermissible. None of these matters is dependent on the other for validity.

However, there are four steps in this deal that are very sensitive; it is necessary to pay attention to them in every deal:

1.   The distributor purchasing goods from the manufacturer.

2.   The agent taking possession of the goods on behalf of the distributor.

3.   The distributor appointing an agent to sell ahead.

4.   Selling the goods to the superstore and taking payment on behalf of the distributor.

(1) The distributor purchasing goods from the manufacturer

In accordance with this step, it is necessary for the representatives of the manufacturer and the distributor, or the latter’s representatives, to make an offer and accept it each time. It should not be the case that the distributor simply hands over the money and then forgets about it, and the manufacturer thinks that they can sell directly because they are acting as an agent. The reality is that the manufacturer has permission to sell the goods of the distributor, but the distributor must have the goods in order for this to take place.

Here, the goods will enter the ownership of the distributor after the manufacturer sells the goods to him and makes him the owner. Then the distributor himself, or his representative, takes possession of them. After this, the goods will be sold to the superstore on behalf of the distributor. It is necessary to act upon this step each time. If the manufacturer does not sell its goods to the distributor on any occasion, the distributor is no longer involved; he does not have a rightful claim to any profit in such a deal, and the money that will be taken from the superstore for such a deal will be the responsibility of the manufacturing company. The distributor will have nothing to do with this money.

(2) The agent taking possession of the goods on behalf of the distributor

When the manufacturer and the distributor agree to buy and/or sell goods, the distributor himself or his representative should take possession of the goods. If the distributor wishes to take possession of the goods via an agent, he can make another person from the manufacturing company his agent, and this individual can be an employee of the manufacturer too. However, the manufacturer cannot be given agency for taking possession of the goods.

To take possession of the goods, it is sufficient for the agent of the distributor to be present near them and to take possession of them without any hindrance or complication, if he wishes. Once the agent takes possession of the goods, the distributor has also taken possession of them. This is because the agent taking possession of the goods is considered the distributor taking possession.

It is important to note here, that the stage of taking possession must be complete before the deal is made with the superstore. If a deal is made with the superstore before taking possession of the goods, it will be impermissible and a sin. This agreement must be terminated from the perspective of Islamic law, and a new deal which is faithful to Islamic law must be formed.^[1]

(3) The distributor appointing an agent to sell ahead

At this stage, the distributor will appoint an agent to whom he will give the authority to sell his goods directly or appoint an agent who will have his goods sold. Suppose a general agency is granted at one time to sell the goods ahead, and it is said, for example, “Whenever I purchase such-and-such goods, take possession of them on my behalf and then sell them ahead whilst keeping such-and-such amount profit for me.” This single instance of granting agency will be sufficient. It will not be necessary to make him the agent every time, as the granting of agency can be linked to a condition. The authority to continuously remain an agent can also be given.

Important note: it is necessary upon the agent to sell the goods at the price that he has been authorised to. It is not permitted for him to sell them at a lower price, to such an extent that if the rate was £100 at the time he was made an agent, and it later increased, he is not permitted to sell it at the old rate. However, if a rate was not set, he is permitted to sell in accordance to the norm, with an increase or decrease.^[2]

(4) Selling the goods to the superstore and taking payment on behalf of the distributor.

Once the distributor has appointed an agent, and he has sold the goods to the superstore, all rights related to this, such as handing over the goods to the superstore and taking payment, are linked to the agent. Therefore, if the goods are sold through an agent, he is responsible for delivering them to the superstore and taking payment at the appointed time before handing it over to the distributor.^[3]

(2) In the scenario mentioned, the distributor will bear any loss that is incurred; it has no link with the agent. This is because when the distributor bought the goods from the manufacturer, it is his property which he has taken possession of. Thus, any profit or loss in relation to those goods is solely linked to the distributor. After this, when the agent sold the goods, any profit and loss are also linked to the distributor, because the only difference the agreement with the agent made is that taking payment, handing over the goods, etc., became the responsibility of the agent.

Any profit or loss incurred on these goods do not become linked with the agent. This is the reason why all of the profit made from this deal will be kept by the distributor; the agent will have no share in this. Thus, when all of the profit made from the goods belongs solely to the distributor, then in accordance to the principles of Shari’ah, any loss that is incurred is also the distributor’s. However, if the above-mentioned precautions are not observed in a deal, the ruling can change.^[4]

وَاللہُ اَعْلَمُ عَزَّوَجَلَّ وَ رَسُوْلُہٗ اَعْلَم صلَّی اللہ علیہ واٰلہٖ وسلَّم