Sheila had been hearing about this investment opportunity from most of her friends for a while, some of them even sent her their referral links urging her to register. One of her friends invited her for a meeting to enlighten her on this opportunity and despite being sceptical she went anyway.
At the meeting the business model was explained in detail to her.
The investment involved putting in money, which would then guarantee a fixed return of minimum 20% per month which could be increased by recruiting new members into the business. During the meeting members who had invested in the business for a while gave their testimonies on how they were making six figures a month due to recruiting new members. Sheila upon seeing the possible returns decided to join the investment. What Sheila doesn’t know is that she is joining a pyramid scheme.
A pyramid scheme is a business model which makes money from the recruitment of new members rather than the sale of goods and services that most business models do. The main characteristic of a pyramid scheme is the recruitment of new members in order for existing members to make profit. How this system works is that old members are paid from the joining fee of new members. This continues until there are not enough new members to support the old members causing the pyramid to collapse. When a pyramid scheme collapses all the investors money is lost with those who invested last suffering the heaviest losses
Pyramid schemes have become more and more common since the beginning of the 2000’s mostly because of the internet. Kenyans have fallen prey to a number of pyramid schemes losing billions when these scams collapsed. One such scam is Deci which left thousands of Kenyans in financial ruin causing some to develop depression, diabetes and in some extreme cases even suicide. Deci promised high returns and even delivered these returns to some of the first investors which enticed other people to join. People took out all their savings in the hopes of getting quick returns with some even taking out loans in order to invest. Deci is estimated to have robbed Kenyans of almost Ksh. 2 billion.
Other pyramid schemes from the recent past include public likes a online based pyramid schemes and MMM global which uses Bitcoin as a way of users to invest for a fixed return of 30%.
To spot a pyramid scheme one should look out for the following signs:
1. If an investment offers abnormally high fixed returns (anything above 30%) within a short period of time such as within three months.
2. Perhaps the most telling sign of a pyramid scheme is the need for members to recruit new members in order to make profit.
3. If the business or opportunity has no clear source of income such as a service they offer or a good they sell.
4. If they invite you for seminars where details on the business operations are given vaguely or said to be too complicated to understand.
5. Where recruiters say you can earn upto a given sum if only you recruit a given number of people.
If you see some of these signs in an investment you should exercise caution. You should only invest money you wouldn’t mind losing or better yet avoid them completely.