Pyramid Schemes in East Africa

Back in October 2006, I wrote two posts about pyramid schemes that had mushroomed and would eventually ‘burn’ thousands of investors in Kenya.

And the last year has revealed bigger pyramid scams in the form of Bernie Madoff and Alan Stanford, and just yesterday in the Kenya Parliament, some political leaders were un-masked as some of the master minds behind some of the collapsed Kenyan schemes.

Image of pyramid investors from another business daily newspaper article on pyramids
So what was the genesis of the schemes and how they ended? And more important, can they happen again?

Pyramids Rise
– Early investors reaped, and told others about their success – i.e. doubling, tripling or even greater returns in a few months span
– Some schemes were promoted by churches (who received tithes in return)
– Pyramids opened new offices and hired new staff all around the country
– New pyramids opened up cloning existing ones, but promoting a slightly different product/concept
– People took loans to invest in pyramids
– Peoples sold land/ shares / other assets to invest in pyramids
– Pyramid investors cut across all sectors from rural farmers to bank managers

Pyramids Peak
– Early investors reaped, but were greedy and ploughed back as much as they won
– Pyramids grew so big they overwhelmed their managers – some stopped accepting new depositors (but not new deposits which were essential to the chain)
– Banks complained they were losing deposits at a time when interest rates were very low
– With IPO’s few and far between, stockbrokers complained they were losing investors during a bull market period

Pyramids Fall
– Banks put the squeeze on pyramid schemes, by freezing these recipient accounts with the funds in them
– Pyramids without cash, tried to switch to different banks and accounts to process their funds
– Banks warned other banks and the Central Bank issued some cautionary notices on schemes
– Some pyramids tried to convert into cooperative societies
– Some schemes bad-mouthed other pyramid schemes as unstable
– When locked out of banks, pyramids moved to safe houses in residential areas where they continued to receive/pay cash
– media coverage kicked in; some angry investors complained on TV about lost money and brought media crews to the safe houses showing other angry investors
– Deposits dried up, and investors demanded their cash.
– Pyramid schemes all collapsed largely at the same time in 2007

Sifting the rubble

Could they have been prevented?
– They were unregulated: Neither the central bank, capital markets or co-operative sector regulator had over-sight over the schemes. Parliament was focused on micro-finance and anti money-laundering regulation bills.
– KYC: Schemes relied on the banking system to move around the money; and if banks applied true know your customer (KYC) principles, they’d have smelled a rat – with hundreds of people queuing in their halls to deposit funds into a single customers account

Unanswered questions
– What happens to the millions of shillings frozen in bank accounts?
– What happened to employees of these schemes? And if rogue stockbrokers were partly brought crash down by thefts from within (internal fraud /‘robbers robbing robbers’) could this also have happened at some schemes?
– Legal grey area still exists. Have any promoters being charged in court? Can any investors sue promoters for losses? The Cooperatives Ministry Task Force is looking at how to compensate investors – but is this justifiable?
– Can schemes rise again? History teaches us that pyramid/ponzi schemes will happen again and again. Maybe using mobile money transfers, or next time there’s an election. The Business Daily mentions they may have spread to neighbouring countries

15 thoughts on “Pyramid Schemes in East Africa

  1. jke

    Great summary here, Banks. Me thinks that it is what ppl get if they believe in such schemes. But someone taking a loan to invest in such a scheme is just extremely sad.

  2. Crystal balls

    I agree, great summary. Desi played out here [in Dar] the exact same way. But if i’m understanding it correctly, then the problem isn’t the pyramid scheme per se, it’s the freezing of the accounts when the banks felt threatened. Does that mean the schemes themselves aren’t a genuinely bad idea? I’m not defending it, just trying to get a clearer picture.

  3. d'moiselle

    methinks pyramids aren’t such a bad idea… the corporate world itself is based on a pyramid, i.e. the structure of any corporation IS a pyramid, with the biggest earners at the top…

  4. kainvestor

    for those who still think pyramids aren’t bad…then i guess you haven’t experienced their wrath. for your info pyramids don’t give any goods or services, they exchange money for more money. Thats is it! its pure fraud.

    I believe loosing money to pyramids is just a symptom of lack of proper regulations. As bankelele puts it the authorities played blind to the evils of the pyramids as they set up all over the country and swindled kenyans. and sure THEY WILL BE BACK.

  5. Village Analyst

    The alure of Ponzi schemes is hard to resist since they are founded on human notions and aspects that only the intellignet investor considers; Behavioral Finance!

  6. Anonymous

    Talk of legalized and legitimized Ponzi Scheme–NSSF. All Ponzi scheme have the same concept, as Kenyan middle class and working age population (pension contributor’s) declines for well known reasons,some retirees with be left with claims that cannot be honored.

    The same is with Government debt, etc.

    So Ponzi Schemes will always be with us.

  7. bankelele

    jke: many smart ones knew, but many more did not know they were in a pyramid

    Crystal balls: Wow, DECI was also in Dar? The schemes are bad, they are not sustainable, banks were to blame fo negligence, but not for shutting them down,

    MainaT: Chivalry is not dead

    d’moiselle? really? 20 suicides, 1 murdered pyramid manager, thousands of suckered ‘investors’ may disagree

    kainvestor: they were selling gold dust, gold bands, chemicals, but some just said aww hell -and traded lotto tickets/receipts

    Village Analyst: as ka-investor said, THEY WILL BE BACK

  8. Brian Oduor

    ‘Greed is Good’

    That is the mantra that drives most of the people who get into these schemes – be it the normal mwananchi who just wants a better house or the rich Palm Beach residents who are tired of last year’s Rolls Royce.

    But to curb this human weakness, the government needs to regulate such schemes and punish those involved heavily. But as the civil society too, we need to tell those who don’t know better that it is a mess.

  9. Maishinski

    …and the mother of all pyramid schemes?

    Global stock markets.

    Think about it:
    The seller believes the price will go DOWN – hence sells knowing there’s bound to be a fool who will buy the shares.

    You buy thinking there’s a bigger fool who will buy from you at a higher price.

    Price goes up. You get greedy and hold out for more. So does everyone else. Supply goes down – demand goes up. price follows. More fools jump in.

    Then someone realizes that the share is overpriced and refuses to pay more… Supply goes up – everyone wants to cash in on the next fool. Demand goes down.. fools want to wait. price follows.

    Quiet moment.. nothing happens.. everyone’s waiting for the next bus.

    Suddenly, someone realizes that the sellers are being foolish and the shares are actually underpriced… fools sell thinking price will go lower and they will buy more shares. More buyers come in… the fools (seller) sense an upsurge in demand… decide to wait… supply goes down.. demand increases… price follows..

    It’s one big ponzi scheme.

  10. Anonymous

    Dont sweat the details E-Nyce.

    “Pryamid Scheme” is the new sheng for Investor Rip-off.

Comments are closed.