If you are offered more than one percent per month, don’t take it!

By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

18 November 2007

Even after numerous news reports of many people loosing their money in “Pyramid” schemes, I am amazed that scores more are still putting their life’s savings into these financial scams. Consequently, a lot of readers have asked me two basic questions, namely; how do these schemes work and how can one you identify one?

Strictly speaking, the scams currently operating in the country are not “Pyramid Schemes”; they are “Ponzi Schemes”. As discussed here in December last year, a Pyramid Scheme involves the recruitment of new members through the sale of worthless certificates.

A Pomzi Scheme works like this: I invite people to invest, say, Sh10,000 and offer ten percent per month for six months. The initial investment is to be paid back at the end of the term.

Now, suppose one person called “A” gives me the Sh10,000. On the first month I give him Sh1,000 from his initial sum and I am left with Sh9,000. On the second month, I give him another Sh1,000 leaving Sh8,000. When I pay him his third month interest, he now truly believes that he has found a genuine investment scheme. By that time, I have only Sh7,000.

Because he trusts me now, he tells his friend “B”, about it and she quickly agrees to invest Sh10,000. Now I have Sh17,000 in total. On the fourth month, I pay them Sh1,000 each and I am left with Sh15,000.

On the sixth month I pay them another Sh1,000 each and now I have Sh13,000 remaining. But I also refund the initial Sh10,000 to the first guy leaving me with Sh3,000. Note that I still owe B four months of interest (Sh4,000) and her capital (sh10,000). The total owed is Sh14,000 and I only have Sh3,000 – I am technically insolvent!

Greed now takes over – not mine, but that of A. I casually mention to him that he can re-invest his money for another six months. Of course he agrees, and not only that, he will tell his next best friend “C” about this goldmine.

So, on the seventh month, I will get Sh10,000 from “A” and Sh10,000 from “C” bring the total in my bank account to Sh23,000 – remember, I had Sh3,000 left over in the sixth month. I will then pay Sh3,000 as interest to my three investors leaving me with Sh20,000.

At this point I can decide to go into hiding but since I can’t hide very far with only Sh20,000, I decide to continue until I have Sh200 million… But now you can see the sequence, eventually, some people make some money but many lose everything – while I am having fun on an island located 266km to the north of Erehwon!

How do you recognize the scam? That is easy: if anyone guarantees to pay you more than ONE percent per month be afraid; be very afraid – even if you are introduced by your best friend!