Dropshipping has gained popularity as a method of businesses due to the ease with which companies can go to market. A retailer simply markets products from a wholesaler or manufacturer, takes orders from customers, and only after receiving payment does he purchase said items and arranges for delivery to be made directly to the customer without needing to handle it.
The question arises whether or not such a transaction is permissible in Islam due to the appearance of selling something that the retailer does not own.
The general ruling in Islam is that it is prohibited to sell something you have no ownership of. The reason for this is quite simple – the likelihood of failing to deliver is high, which is likely to cause disputes. Trade laws in Islam center around the elimination of uncertainty (Gharar) and clarification of rights (i.e. who has liability). When you sell something before you own it, there is a high level of uncertainty over both the item as well as the liability. For this reason Prophet (peace and blessing be upon him) explicitly prohibited this type of transaction when he told Hakim ibn Hizam,
“Do not sell what you do not own’ (Tirmidhi, no: 1232)
thereby setting a default ruling of prohibition.
Nevertheless, there is an exception to this general rule for a type of transaction called Salam (forward sale). This is a sale whereby the seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advanced price fully paid on the spot. The item is bought on cash whereas the seller delivers on credit. The Prophet (peace and blessing be upon him) made a concession for this type of sale when he saw many farmers using this model of financing to fund their work.
Ibn ‘Abbas narrates:
“The Prophet came to Medina and the people used to pay in advance the price of dates to be delivered within two or three years. He said (to them), ‘Whoever pays in advance the price of a thing to be delivered later should pay it for a specified measure at specified weight for a specified period’”(Bukhari no: 2239).
If dropshipping is Islamically allowed, it will have to fit the Salam mechanism. In Salam transactions, the buyer (Rabbul Salam) pays the agreed amount (Ra’s al-Maal) to the seller (Muslam Ilayh) for an item (Muslam Feeh) on a set date and place. In dropshipping, all of the same components are there except with the addition of a wholesaler/manufacturer. But even in Salam, the seller (Muslam Ilayh) does not need to disclose how he will procure the sold item (Muslam feeh) to the buyer (Muslim) as long as it is not haram; therefore the Shari’ah does not stipulate that the wholesaler/manufacturer be an explicit part of the transaction. So it is obvious that dropshipping has the same components as Salam, but for it to be Islamically permissible it would also need to meet its conditions.
We see from the hadith that the Prophet (peace and blessing be upon him) allowed a seller to take payment for an item in advance of having the ownership of it, but stipulated certain conditions for it to be valid. The scholars explained these conditions to be:
- The sold item must be describable in detail, such that the item is distinguishable from its like in the same category. Similarly, all the factors that will impact its price must be stated.
- Quantities must be stated.
- Date of delivery must be specified and agreed, as well as address of receipt.
- After the above details are clarified, the price must be concluded.
- The item must be normally attainable at the date of delivery and not down to chance or luck
- It cannot be for an exact item, e.g. this particular iPhone with serial number XYZ. Therefore it has to be for a product of which there are many of it of its kind.
- The item’s price must be paid in full at the time of the agreement, and cannot be delayed.
- That Salam cannot done with any of the Ribawi items (items which are sold by weight or measure) where delay is prohibited when exchanging one for another, e.g. barley with wheat (Ibn Qudama, Al-Mughni: Bab al-Salaf al-madmun ila ajal musamma).
These conditions, when applied properly, eliminate the two main reasons for the prohibition of selling before owning, i.e. the ambiguity over the item and ownership.
Anyone operating in dropshipping will have to ensure all of the above-listed conditions for Salam are fulfilled. Only this way will it be exempt from the prohibition of selling something before you own it.
Dropshipping, in the way that it is currently operated online, has the retailer market items which he does not hold or even own. This saves on the cost of purchasing inventory, as well as on overheads for production and storage. All items listed are held by the manufacturer who sells to the retailer for a cheaper price than what it will be sold to the end buyer for. When the retailer actually makes a sale, he purchases the item from the manufacturer, who sends it directly to the end buyer. The process is seamless and runs perfectly through its use via the internet.
Going back to the conditions of Salam and applying them to the dropshipping process, firstly, the item will need to be clearly described, such that the customer will know exactly what they are purchasing. E.g. it cannot be listed as just ‘a phone’, or as ‘an Apple iPhone’; even a description like ‘an Apple iPhone 7’ is not an adequate level of detail. Rather all the things that will impact the item’s price will need to be detailed as well as the features that separate it from its like, for example: ‘new Apple iPhone 7, 64GB, white, boxed’ etc.
Secondly, the price of the total purchase as well as the cost of delivery and handling must be clarified beforehand; the delivery date and address also needs to be stated, as is customarily practiced anyway. Lastly, the agreed price must be paid in full by the customer, after which the retailer goes about acquiring the item from the wholesaler/manufacturer, which is then delivered on the set date and address. Regarding the retailer having to gain possession (Qabd) of the item, when it is handed over by the manufacturer to the delivery company, the retailer has actually gained possession as well as ownership, because the delivery company is working as his agent (wakil). So as long as the item in question is not one of the Ribawi things (gold, silver, dates, wheat, salt and barley), and the retailer actually purchased the item from the wholesaler, such a process will be a valid Salam transaction, permitted by the Shari’ah.
The prohibition of selling something you don’t own is indisputable, however, the allowance of the Salam transaction shows us that there are exceptions to this rule. The main reason for prohibiting the sale of items before owning them is because of the extreme uncertainty involved and the likelihood that such a sale will lead to disputes. When the uncertainty can be eliminated and the delivery of the item all but guaranteed, as is the case when the Salam conditions are met, it becomes a permissible way of doing business. This is what we find in the Salam transaction which the Prophet (peace and blessing be upon him) practiced, and it is also what we find in the way commercial transactions are carried out over the internet. The process is smooth and seamless, with a raft of consumer rights protecting customers from fraud and bad business practices. For this reason, it is clear that the dropshipping method of business, so long as conditions of Salam are met and the sold items are halal to buy and sell, is permissible in the Shari’ah. And Allah knows best.
Authored by Mahmud Shahnawaz
Reviewed by Shaykh Ashraf Zaman