Sunday, March 19, 2006

A study of the Mobile Cashback Controversy

Assalamu Alaikum,

Alhamdulillah, we are steadily moving forward. To those who have accepted the invitation, Jazakumullahu Khaira!

The mobile phone cashback issue being one of the topics that came under scrutiny and debate during our union, I thought I should put forward my humble understanding on this forum. What I have understood is from what our revered Shaykh Taqi Usmani has said regarding the issue during this visit and also in a previous fatwa.

This issue, to the best of my knowledge, was first raised by Shaykh Haitham al-Haddad who concluded that this type of contracts involve some element of Riba or Rishwah.

Before we delve into further detail, some clarifications need to be made: In cases where the Service Provider itself offers half price line rental for an initial period of service, that is beyond the scope of this debate, as that is effectively hatt-uth-thaman min qibal-il-bayi’. Secondly, this contract seems to be not that of ijarah (although we call the payments Line ‘Rentals’), but that of bai’-al-istijrar for various reasons which can be deliberated upon, if needed, some other time. The following arguments are based on this precept.

My first thought at reading Shaykh Haytham's fatwa was that the parties invloved in the transaction had not been aptly identified. Hence, I've tried to illustrate this in a diagram.

The different stages of this transaction are as follows (please look at the diagram):

  1. A makes an agency agreement with B, on the basis of which A will provide B with cheap handsets with SIMs or give him a commission if B is able to introduce a number of customers on a particular tariff. Usually, a group of high street shops form a company and get these deals through the company, thus receiving a greater commission. In our diagram, this transaction would be A1.
  2. B analyzes the commission amount, and after keeping a portion for himself, promotes the deal with the extra amount to be given as cash back as an incentive to attract customers.
  3. D contacts B and shows his consent to enter into a contract with A. B concludes the contract between A and D as an agent on behalf of A either by obtaining D’s signature or through a verbal/online agreement. In our diagram, this transaction would be the dotted arrows in C2. At this point, B ceases to be the agent for A for this contract as all future correspondence and payments for the service will go directly to A. This is the complete line of C2 in our diagram.
  4. C his initial promotion offer to D either instantly (very rare!) or conditional to continuation of the service with the same provider for a period of time. This would be P1.

There are certain other points to be kept in mind:

  • The promised cash-back is never given by the service provider. The service provider only provides the service to the customer and a commission to the agent for fulfilling his agency agreement. So, the benefits given by the service provider to the two parties are very distinct to each other. Also, this shows that the cash back is not coming from the same jihah (direction) as the airtime service.
  • The contract between the SP (service provider) and the customer does not have any mention of the cash back, as SPs have no connection to it. These contract forms are standard application forms requiring personal data of the customer, choice of tariff and payment details. The agent only writes his Agent ID provided by the SP for identification purposes.
  • The customer pays line rentals to the SP and the cashback comes from the agent, not in his capacity as the agent (as the agency for this particular contract has ended with the application), but as a now third party to the contract.
  • The SP advances the commission to the agent as soon as the application is successful. That is why some retailers advance the full cashback amount to the customer in the first month of service. The only reason why most retailers don’t do so is not because they haven’t received the commission, but only because if the customer fails to submit the required documents within the specified time period, his entitlement to the cashback is forfeited due to his negligence; which gives the retailer the advantage of promoting an attractive offer and restricting the customer’s entitlement to benefit from this offer.
  • To understand this better, the customer, on application, agrees to enter into a 12 month or 18 month binding contract and cannot cancel the contract after the 14-day guarantee period. So whether or not the customer uses the service provided to him, he is still liable to pay the monthly line rental amount to the SP. The payments for the SP are secured by the contract, so there is no reason for them to withhold the commission to the agent.
  • Also if the customer decides to terminate a 12 month contract, say after 4 months, the SP will oblige him to pay the remainder of the instalments upfront to release him from the contractual agreement. If he does so, his contract has terminated in 4 months. If the first cash back instalment was due, say on providing the sixth monthly bill, he will be unable to do so. In this case, the retailer will not provide him with any cash back at all. (I have confirmed this!) This shows that this promise is not a contractual agreement.
  • Traditional fuqaha have differed on the legal enforceability of a promissory undertaking, although they all agree that is enforceable diyaanatan. But the contemporary scholars all agree that if an individual has undertaken a risk based on a promise given to him, this promise will be enforceable qadha’an too. Therefore, we can’t argue that if something is legally enforceable, it automatically assumes the nature of a contract.
  • Since it is a promise, and not a contract, all attributes of a promise can be mentioned in its documentation. The retailer may stipulate that he’ll only reimburse the customer provided he produces certain set number of monthly bills within a specified time period or that he stays with the same tariff for a specified period of time or even that he’ll not sell his phone to someone else or transfer the contract to someone else’s name. These conditions have no connection with the SP. (Apart from the ‘same tariff for a time period’ condition apparently, but that agreement with the SP is in the actual contract – so these are two separate agreements.) Some of these conditions are ghair mulaaimah lil-aqd but are enforceable because this is not a contract, but a promise. Its like saying, “I’ll give you £100 if you jump that hurdle.” – which is okay; what’s not okay is to say, “I’ll pay you for your item only if you jump that hurdle.” The first is a promise and the second a contract of sale.

The conclusion is that, generally, these are two separate transactions in fiqhi terms, and there is no element of Riba involved.

But, what we’ve got to discuss is, if the customer also signs on the redemption agreement, does mujarrad signing on the paper take this agreement out of the nature of a promise into that of a contract, even if the above mentioned differences are still found in this agreement?

This is because I was told that some agents do take a signature from the customer on the redemption agreement too. Although I’ve never witnessed this and have not found this to be the case in general after consulting some friends who are in the business. However, they say that even if this happens, it will just be a measure undertaken for customer satisfaction.

My humble opinion is that this would not change the legal aspect of this agreement. Please deliberate on this issue.

Wal ‘Ilmu ‘indallah al-Latif al-Khabeer

Ibrahim Amin


Blogger Abu Eesa said...

Ahsanta Ya Ibrahim.

I think that we can simplify the issue now in more Shar'i terms for I reckon everyone understands the reality of the contract now. Hence, I can summarise all my previous points alongside those made by Ibrahim.

The first claim that it is riba because the customer gives money and then receives money plus phone (whether deferred or spot) is not the problem. Why? Because although the money (cashback) might end up in the customer's pocket from the Service Provider, this is not our problem.

This cashback has come from the side of the broker himself, totally independent of the company's wishes. Although the broker was a wakeel in the initial stages, he is not a wakeel when he gives the cashback - hence the cashback has nothing to do with the company per se and therefore the claim of riba is difficult.

A side point to prove this: I understand that the Service Providers, wanting to cut down this type of business deal, have slashed the amounts of money given to the brokers as commission in order to prevent them 'discounting' their line rental via cashbacks. This can be clearly seen by those versed in the High St where the deals are getting 'worse'.

Now, the only issue to resolve in my opinion is: if indeed there is a condition between the two separate contracts, then there is either a danger of:

(a) riba (because then yes, the money from the Service Provider is intentionally returning back to the customer which is either riba, or even 'inah it could be seen, and even a sly rishwah from the side of the SP and the broker) or at least

(b) gharar because the ishtiraat of one contract on the other causes this. And Allah knows best.

I suppose Shaykh Haytham's question for Mufti Taqi is: for which reason are you preventing ishtiraat of the second broker contract on the first SP-customer contract?

In any case, as long as a promissory nature remains (as it is in a large number of cases) then this problem is avoided. And Allah knows best.

Jazâkumallâho Khayran

Was-salâmu ‘alaykum wa rahmatullâh

Abu Eesa

6:38 pm  
Blogger Ibrahim Amin said...

The first response to my post was made by Br. Hood Bradford, raising some of the concerns Shaykh Haytham had with the issue.

Firstly, let me introduce Br. Hood in his own words: “My name is Hood Bradford and I am from the U.S., I am currently pursuing a Masters of Islamic Law from the University of Madinah, having graduated with a bachelors of the same.”

He posted the following:

1- Mufti Taqi's comments are consoling, and I would appreciate anyone that may have the audio or notes for what he said verbatim.

2- I am in basic agreement with Abu Eesa, although I have reservations about the fact that the rebate may come at a later date, although this maybe reconciled by stating that the rebate is a form of Kafalah from 3rd party, and thus unrelated to the contract. I have looked for some actual contract stipulations on the net, or a generic market standard for the rebate system yet was unable to find one. I am keeping myself in Jurisprudential limbo until I can find actual documentation about the system, since all previous discussion were based on probabilities and no documentation was provided by anyone, either yay or nay.

9:49 pm  
Blogger Ibrahim Amin said...

Br. Hood further posted to my initial response:

Having discussed with Sh. Haytham before, I think that his major point was that regardless of what capacity the agent is working in, the End User/ Customer (D) is still paying an amount of money and then receiving more back at a later date. This is then how it would equal Riba [$450 now <--> $550 over the next year].

Obviously if the rebate is given at the time and point of sale then this issue is non-applicable. Yet when the rebate is paid out over a time period, how then do we justify this increase in either cash, goods, or services?

9:51 pm  
Blogger Ibrahim Amin said...

My response to that:

It can never be the case that the customer will receive more than what he'll pay in terms of money. If he pays line rental of, say £300 annually, the amount he'll get back in cash back schemes will be less than £300, be it £299 only.

But that's besides the point. And to understand why lets see this scenario: A buys an item from B, who is the marketing agent for C, the manufacturer. Eventually A sells this item to C at a lesser price than what it had cost him. Effectively, A used this product and sold it back to a person whose agent had once sold this item to him. He benefitted from the product and sold it at an amount that was less than his cost. For argument's sake, lets say he sold it to C with a profit. Does this make any of the above transactions invalid?

The key thing to note in the whole issue is that the money spent and money acquired by the customer is not from the same source.

Also Br. Abu Eesa rightly pointed that the SPs have 'slashed' the rates. 3G, when initially stepped into the highly competetive market, introduced such commission rates that it was possible to get a brand new phone + 500 cross-network anytime minutes + 100 texts and you only ended up paying about £0.99 for the whole year. (If anyone still knows this type of offer going around, please post on this group. ;-)) Nowadays, 3G is an established figure in the market, so no more *deals*.

I think Abu Eesa has summarised the debate to a very much conclusive extent. As regards to the cashback offer being a promise or a contract, it very much seems from the current market practice that it is a promise and not a contract. The latest trend in the market is that when you buy the phone, the retailer will issue you some vouchers with dates of redemption and the amount to be redeemed printed on its face. You need to send those vouchers to the retailer to get them redeemed. The conditions are that if you mispalce or lose these vouchers, you are not entitled to anything, even though you may provide monthly line rental bills. This shows that the contract itself is of no importance to the cashback.

Wal 'Ilmu 'indallah

9:53 pm  
Blogger Ibrahim Amin said...

Shaykh Hood's response quoting part of my reply:

“It can never be the case that the customer will receive more than what he'll pay in terms of money. If he pays line rental of, say £300 annually, the amount he'll get back in cash back schemes will be less than £300, be it £299 only.”

Jazakallahu khairan for your valuable comments.

The contract structure is well known now, as is the issue of the contractual promise.

The above point quoted is very important and interesting. However, is there anything stipulating that "Riba" has to be particularly a cash return on a debt?

Secondly, How do we disregard the very important principle of "al 'ibratu fi 'l 'uqud bi 'l maqasid wa 'l ma'ani, la bi 'l alfaz wa 'l mabani" (The purpose and meanings should be considered in transactions; not the wordings and structure)?

Here the customer is saying to himself "$400 now <--> $399 + phone + free minutes later (total est. $490)" so why not? So his intention here is to gain a deferred increase on his debt, regardless of where it comes from. So his intention is to gain an increase, and I believe this is the point that Sh. Haytham was trying to make.

How then do we explain this contract in light of this principle and in light of the possible "hila" (bypassing device) for Riba?

10:17 pm  
Blogger Ibrahim Amin said...

Br. Shaher Abbas, Product Manger at IBB, who was also with us at the Markfield course had this to say:

Following the steps of our Skh. Abu Eesa, I will introduce my self. I am originally from Palestine, but I was born in Damascus. I finished my PA in Economics and Accountancy from Damascus Uni. I worked in Syria until I moved to Norway were I worked for three years and got married then I came to England to study at Loughborough University where I finished a post graduate diploma in economics then a master in Islamic Banking and Finance( و الحمد لله). After graduation I joint Islamic Bank of Britain where I work now.

As for the issue of Cash back, I did attend the discussion with Mufit Taqi Saheb and my understanding of what I heard from him is the same of brother Abu Eesa. However, the important issue now is how can we change the contract (if there is any) between the customer and the agent to take it out of the doubt area. (I said doubt here as I still think, and Allah knows best, that this is not Haram).

Therefore, the solution can be either:

1- Change the contract to a unilateral promise by the agent on a paper signed by him (as mentioned by Abu Eesa) (No signature from the customer is required).

2- Or to understand the contract in the following way:
1- The Broker is the agent of the company to generate sales 2- the company will not pay the agent unless the customer stay for at least 6 month. 3- the broker after that make a discount on the original price to the customer ( this can be mentioned in a contract with the condition that the customer will not get this discount unless he stays for 6 month).

This type of discount is called حسم الاستجرار ( I think in English will be some think like discount on big quantity). This will work as follow:

A Manufacturer of cars wants to sell extra cars. They design a scheme like this and tell their agents if you purchase X number of cars I will give you discount. This agent in order to sell this X number passes the same discount to his customers. This model is well known in the market and used in many industries. The Cask back works on similar principle.

For conclusion: In the contract between the customer and the broker, the broker will state that he will give a discount to the customer if he finishes his contract. Even if the discount was more that the actual price paid by the customer (taking into account the value of the free handset) this can be considered as promotional gift.

I don’t know if I am right or wrong. But I think و الله أعلم that this can be permissible under either of these solutions.

Wa Assalam Alikom

Shaher Abbas

Product Manager
Islamic Bank of Britain PLC

10:22 pm  
Blogger Ibrahim Amin said...

Following Sh Hood's previous post, I had posted this in response:

Assalamu Alaikum,

Shukran, Br. Hood for your comments.

Riba would be i) any uncompensated increase on the principal loan or ii) any increase per se on things of the same genus. So, if a person lends £500 and receives £550 and there is no other factor involved in securing the extra £50, then this increase is uncompensated, and therefore would constitute Riba. But, if the lender provided a chargeable service to the borrower during this period, then it wouldn’t be Riba.

Similarly, if the borrower paid back only £450 without any reason for the decrease, he will have consumed Riba. But, if there is a factor involved which warrants a credit to the borrower, then it wouldn’t be Riba, rather it will be assumed that the decrease was to off-set that charge.

This shows that in our argument, Riba will only incur if the customer receives more than £450 by paying £450. But if he receives £350 and some services, there will not be any Riba in this transaction. Any increase does not amount to Riba. If it was so, what would then be the difference between interest and profit?

Although this is not relevant to our issue, as indicated by Br. Abu Eesa also, I was just wondering what would have been the case if the direction of the cashback was the same as the recipient of the ‘rentals’. I thought it would have solved the matter at the very outset. The case would then be that the SP introduced a tariff to the market. This customer buys the contract at that tariff. The SP has said that it will reimburse the customer with a major portion of his payments at a specified date. This would be a discount offered by the SP to the customer on his past payments. Even if we said this was a shart (condition) and even if this was mentioned in the ‘aqd (contract) itself, it would still be a shart mulaa’im lil’aqd (condition harmonious with the contract).

But, the SP has no reason to do this and that’s why the key difference is, as indicated, the difference of the direction of the two payments.

As for the principle of ‘al ‘ibrah lil ma’aani…’, it is only applicable, as is evident, in a scenario where a transaction has been given a different name than which its nature demands. Here, this is not a case. In fact, it is the case in that an increase per se has been identified as Riba, when the nature of the transaction has nothing to do with it.
Its like saying, “If you buy a car from B I’ll give you £100.” How can a third party voluntary payment be classified as Riba? If the customer is intending to gain an increase, so is a trader and investor. He too, inputs money on the hope of receiving more, but the direction of increase is separate to the direction of his input.

So, if the direction of return was same (which is totally illogical), it would constitute a discount on previous payments from the SP, which is hatt-uth thaman min qibal-il- bayi’ (decrease in price by the seller), which is totally permissible. And, when actually the directions differ, there is no question of Riba, because a third voluntary party is paying this money back to him. So, this gain in capital is an independent earning as a result of a third person’s promise. It is not a deferred payment on a debt.

Anyway, I just found today that Dial-a-phone does not send you cash/cheque, but the amount is credited to your mobile phone bill upon producing the voucher in the specified period. You are not able to cash that credit note, but that only serves to offset your future line rentals. This credit note is offset from Dial-a-phone’s monthly commission entitlement from the SP. I thought it was the same as what we are discussing now that instead of cashing the voucher, the customer receives the money in an alternative form. The cashback, literally, does not come to the customer but to the SP as an agent to offset the customer’s account. Is there a difference in hukm (ruling) in this situation? I think they are the same!



10:32 pm  
Blogger AbuYoushaa said...


Hope you are all in good health and firm Imaan. I am making a post here to request you brothers to summarise the outcome of this "controversy". Is there still any problem the way cashback works? Jazakallah. Please reply.

Your brother

Abu Youshaa

12:21 am  
Blogger quranteaching said...

I agree with Abu Eesa

6:13 pm  
Blogger Zmalik said...

Quite impressive blog on cashback, inspires me a lot.

5:25 am  
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1:30 pm  

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