Ponzi or pyramid schemes seem to be everywhere lately. Last year, one of the largest international Ponzi schemes, Mavrodi Mondial Movement (MMM) set up shop in Nigeria, and about 3 million people joined. Another pyramid scheme, Ultimate Cycler, reportedly registered 2,000 people every week until it shut down in December. And despite reports that people lost about ₦18 billion to MMM, a new scheme, Twinkas, keeps attracting participants, including those who have lost money before.
The media has documented these developments, dutifully pointing out Nigerians' gullibility, but something about this characterization doesn't quite ring true. In a country where being "sharp" and streetwise are hailed as virtues, it is hard to understand why millions of people would be repeatedly conned by various versions of the same scam. Are people really victims or are we victimising each other?
Current Winners, Future Losers
A Ponzi scheme is an investment scam that typically operates in the following way: Mr Money Maker rides into town and asks the townspeople to invest in his new business, Money Making Machine (MMM) Inc. He claims the business involves turning oil into gold and is so profitable that he will pay investors a 30 percent return on their investment every month. But there is no oil, and there is no gold. Each month, as payment comes due, Mr Money Maker recruits new investors and uses their money to pay old investors. One month, Mr Money Maker can't find any more new investors; without more cash coming in, he changes his phone number and quietly vanishes into the night. MMM Inc. is no more, and all new investors (or reinvestors) have lost their money. Pyramid schemes differ slightly by paying participants based on how many new members they bring in, but the underlying principle is the same – people only gain money from the future losses of other participants. And so, Peter is robbed to pay Paul.
Government agencies usually assume that participants are oblivious to the true nature of the Ponzi scheme. In our example, Mr Money Maker would be charged with committing fraud because he lied that he was creating value by turning oil into gold; in reality, he was only shifting money around. Public officials expect that sharing information would reduce participation and encourage people to move their money to real investments.
But what if Mr Money Maker didn't lie? What if he rolled into town and boldly stated what he was doing?
Interestingly, the recent crop of Ponzi schemes in Nigeria make no secret of the fact that participants are not investors and will receive money only from other participants. MMM notoriously describes itself as a community. The schemes are clearly not designed to attract and deceive people who are looking for "proper" investment opportunities. So, if investing is not the incentive for participation, what is?
High Risk, High Reward
Right now, many Nigerians appear to approach these schemes with a mentality more akin to gambling than investing. They understand they stand to gain a lot of money as long as other people join but risk losing their money when the scheme folds up. And when EFCC tells Nigerians to "learn their lesson" from the failure of MMM, people aren't learning how to identify and avoid Ponzi schemes. Instead, they are learning strategies for playing the game better, such as, not putting in more money than they are willing to lose, not participating in any one scheme for more than a few months, and cashing out while they are ahead.
For Nigerians, MMM is like a reverse lottery: your likelihood of winning increases with the number of people who participate. So information campaigns to sensitise people against Ponzi schemes may have actually made these schemes more popular, and thus, more profitable!
If Nigerians see Ponzi schemes as a gamble, then it is not surprising that participation rates are so high. In recent years, Nigerians have displayed an increased propensity to gamble. Although there are only three licensed casinos in the country, gross revenues for casinos more than doubled from $26 million in 2011 to $56 million last year. Sports betting has grown even more. In 2014, close to 60 million Nigerians each spent an average of ₦3000 a day on sports betting.
Countries like South Africa, Kenya, and Zimbabwe where MMM successfully operated have similar gambling trends, suggesting that this pattern is not unique to Nigeria. Perhaps the best way to understand why Ponzi schemes have thrived is to examine why gambling has become so popular. From this perspective, strategies to curb illegal gambling may be more effective against the current crop of Ponzi schemes than traditional approaches.
A Broad Appeal
All this talk of betting and gambling may lead you to conclude that Nigeria's Ponzi schemes are mainly filled with young people. After all, the young are usually more willing to take risks with money, hanging around "Baba Ijebu" lotto kiosks, crowding sports betting centres, and diverting their school fees into Ponzi schemes. But that's not the whole story. Although there is no comprehensive data on all participants, there are just as many anecdotes of older adults putting in their pensions or trying to augment their civil service salaries to care for their families.
The common denominator for all groups is economic uncertainty. Entrepreneurs in Nigeria worry about the survival of their businesses and workers face uncertainty over their salaries being paid on time, or even paid at all. And these fears are not unreasonable; many businesses shut down last year, and over 10 million people were unemployed as at June 2016. With their livelihoods already at risk, people look more willing to try their luck with Ponzi schemes as a potentially more lucrative bet.