QNet: Not all pyramids make money for Egypt

Ahmed Feteha, Thursday 5 Jan 2012

Ahram Online explores controversial 'direct-selling' scheme that has become increasingly popular among Egypt's would-be entrepreneurs

Qnet
"There is not such thing as easy money" this is one lesson some Qnet IRs learn the hard way.

"Let's face it – by the time you have financial security in your nine-to-five job, you'll be too old to enjoy the benefits."

It's with these simple words that a friend or family member might lead you to reflect on all they have achieved in their career, and then compare their success with your own more limited accomplishments.

They will, however, be quick to lift your spirits with the promise of a “business proposition” that will pull you out of your current “vicious circle.” And what is that business proposition? To join a network marketing scheme run by a company called QNet.

The idea is simple: buy a product from QNet through one of the company’s independent representatives (IRs) for around LE4000 ($666) and, upon purchasing, automatically become a company salesperson. You earn a commission if you’re able to market the company's products to other buyers, who also in turn become IRs.

There is a complex “tree” system in place that allows you to earn a commission whenever any of your recruits – or the recruits they have made – make a sale or enlist additional salespeople.

On the surface, it seems like an easy, guaranteed method of generating extra income – one that has become very popular in Egypt over the past two years.

But QNet has also been the subject of considerable controversy. Just last week, Egypt's head religious authority decreed that network marketing schemes like QNet are haram – proscribed by Islam – as they can be harmful to the economy.

Some former QNet IRs agree with this assessment.

"When you’re given the presentation by the IRs, you’re brainwashed into thinking it’s a guaranteed way to make money,” says Motaz Farrag, an ex-Qnet IR who now runs a Facebook group campaigning against network marketing. “But in practice, the chances of failure are much higher than the chances of success."

IRs receive training on how to give presentations about QNet "businesses.” The more experienced IRs coach newcomers in selling techniques, providing detailed answers to frequently asked questions.

"Those who joined the scheme earlier are the ones who make all the money because they get a commission on all subsequent recruits," Farrag explains.

To many, QNet's network-marketing system sounds a lot like a classic pyramid scheme – a charge the company vehemently denies.

"As QNet becomes increasingly popular, it becomes harder to recruit new participants," Farrag points out. “New members end up not being able to extend their network, but those at the top of the ‘tree’ make money anyway.”

He believes that the market will eventually be saturated as the number of participants outstrips population growth.

QNet has already been the target of official legal action in many countries.

In Sri Lanka, for example, the central bank enacted an Anti-Pyramid Act in 2005 that outlawed multilevel marketing schemes and employed existing bank regulations to stop pyramid scheme transactions in the nation’s banks.

“Direct selling,” the business model used by QNet, was banned in China in 1998 after becoming popular in the 1990s. "The sudden ban showed how concerned the government was about these independent distributor networks, with their door-to-door sales and motivational meetings," the Associated Press reported at the time.

In 2011, Turkey's Trade and Industry Ministry began an investigation into QNet’s Turkish branch, following reports of the company “victimising” employees. Other countries have seen QNet operations suspended due to licensing and tax issues.

The company, however, says its operations are comparable to multilevel marketing schemes that are legal in many countries. IRs often explain that the number of potential participants will never run out because older IRs can reinvest in their “trees.”

The company is also a member of the Direct Selling Association based in Malaysia.

Robert L. Fitzpatrick, a well known campaigner against pyramid schemes, explains that recruitment-based pyramid sales schemes are often camouflaged as “direct selling” companies, allowing them to multiply and gain access to more and more countries.

In general, the QNet scheme is marketed to potential recruits as an opportunity for those who want to start their own business without making a large investment or taking on overheads.

But critics say that, since the scheme always requires fresh recruits, and not only selling a product per se, QNet is – in practice – no different from a pyramid scheme.

QNet was in the media spotlight last week when Egypt's Dar Al-Ifta, the country's highest official religious authority, issued a decree or fatwa ruling the company’s activities haram.

Dar Al-Ifta justified the ruling by claiming that network marketing had a deleterious effect on the national economy. Network marketing “destabilises markets and ruins the concept of work. It also lacks proper legal and financial supervision," Dar Al-Ifta stated.

The negative economic effects of the scheme include an outflow of money from cash-strapped Egypt, a country where attracting foreign investments remains at the top of the economic agenda.

Blogger Sherwette Mansour explains that, if 60,466,176 people joined the scheme, total funds leaving the country in terms of joining fees would reach $60.5 billion (60 million recruits multiplied by an average joining fee of $1,000).

Members up to the level before last, meanwhile, will generate profits in the form of commissions. According to the scheme, IRs receive $250 for every six new salespeople they recruit, so total profits earned by IRs would amount to $2.5 billion, translating into a mere 4.2 per cent of the total amount invested.

Accordingly, QNet schemes provide little benefit for the country in question, as only a fraction of “business” returns are redirected into the local economy.

Nevertheless, QNet enjoys an established presence in several countries. It has offices in nine countries: including the United Arab Emirates, Thailand, Tajikistan, Taiwan, Singapore, Philippines, Indonesia, Azerbaijan and Hong Kong. According to its website, it has a franchise company in Turkey and has agents in Armenia, Jordan and three African countries.

Detailed information about the company, however, is not available. This includes the company's consolidated financial statements and the number of its employees and IRs.

Mansour, however, challenges the assumption that such huge numbers would enter the scheme in Egypt, since "this number of people entering the business is almost impossible because a small percentage of Egyptians can actually afford to pay the $1,000 needed to join."

The ruling by Dar Al-Ifta echoes criticisms made about QNet by many others, including former participants.

"The product in the scheme is irrelevant, so you end up buying something that is very overpriced just to join QNet,” says Ahmed Fouad, a 26-year-old engineer who participated in the scheme for just two weeks before quitting. “There’s no real value-added."

The products that must be purchased to join QNet range from watches to energy pendants, diet products, jewellery and overseas holidays. "You pay a ridiculously large sum of money for a watch that you can get much cheaper elsewhere and it's not even a well-known brand," Fouad says.

Recently, QNet began arranging "training" trips, in which groups of new recruits go on hotel retreats and are coached on selling techniques by more experienced members. But accounts by attendees of such retreats suggest the events have hardly been a resounding success.

"They took us to a gated residential compound and we had to do morning drills in which we stood in line for four hours with the trainers yelling at us," former QNet IR Ahmed Hassan says.

"They banned us from smoking, took our cell phones and woke us up at 5am. It seemed more like a military camp than a selling-skills course," the 25-year-old marketing graduate recalls bitterly. "After that I decided it was all too fishy for me."

Not all experiences have been negative, however, and some QNet participants have expressed satisfaction with their involvement in the scheme.

Recent college graduate Mohamed Saafan, for example, joined QNet more than one year ago after failing to find a steady job. "I’m fully dedicated to the business, which has gone well so far," Saafan explains. "It certainly beats just staying at home."

According to the 24-year-old aviation engineer, those who don't succeed at QNet simply haven’t put in enough effort. "People expect money to start flowing in as soon as they join – that's why many become disappointed quickly," he says.

QNet was established in 1998 with regional offices in Hong Kong and Malaysia, as well as offices in Singapore, the Philippines, Thailand and the UAE.

On its official website, the company describes itself as “a dynamic wellness and lifestyle company… to enrich the lives of its customers worldwide.”

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