Nothing feels greater than having financial freedom. Unfortunately, this form of happiness is not afforded to everybody and this leads to us all striving to achieve it, one way or another. See, I have no issues with everyone looking for this sort of freedom but at what cost?

I know you saw “Power of the P” and automatically thought of something else, ne? I know you were. But no, this is not a story about blessers and the blessed but more about Ponzi & pyramid schemes. These organisations are nothing new to us. Ponzi & pyramid schemes have existed for the longest time but the discovery of 2 popular schemes; Kipi and MMM have led to many discussions recently.

Mass hysteria will have one questioning a lot of things without facts, so I thought it a good idea to help you guys out with simplified knowledge of these concepts. Are they the same? Are they different? Let’s see...

What is a Ponzi scheme?

biography.com

I know that everyone knows a Ponzi scheme to be a scam and quick money making game. It’s quite interesting though that this concept has a history of it’s own. The Ponzi scheme is named after Charles Ponzi, a clerk in Boston who first orchestrated such a scheme in 1919. The aim of the Ponzi scheme is to pay interest to early investors using the funds contributed by the late investors. The idea is sold to “investors” by promising high returns on their investment that they can’t find anywhere else on the market.

With such schemes, there is never really a business or tangible profit generation. The success of Ponzi schemes lies in the referrals that encourage others to join the scheme. After some time, due to the fact that there is no clear business or investment strategy being followed & the lack of new investors, the scheme then sees little returns. This leads a lot of investors to withdrawing their funds from the scheme and in the end, the scheme collapses.

What is a Pyramid scheme?

Very similar to the Ponzi scheme, the pyramid scheme too, runs on a top-down business model that does not sell a real service or product. The main person or company that starts the scheme, later recruits new investors. The idea of the pyramid scheme is so each investor directly benefits, depending on how many new investors are recruited. The person at the top of the pyramid scheme may not have access to all the money in it, but benefit from a portion of all the money that goes into the scheme. The returns decrease, the further down you are in the pyramid.  From the day the scam is initiated, a pyramid scheme's liabilities exceed its assets.

The virtual stokvel

A benefit society, fraternal benefit society or fraternal benefit order is a society, an organization or a voluntary association formed to provide mutual aid, benefit, for instance insurance for relief from sundry difficulties.

Stokvels are not a new concept to us either, especially as African people. With a stokvel, by contributing a fixed amount every month, a group of people get together to save their money, earning interest on it, and choosing to distribute it as and when agreed upon by the group.

In an article by Business Day, it is noted that even though stokvels may be seen as old and uncool, more and more young people are warming up to the idea of pooling their money together to save for a common purpose; be it a holiday or to invest in a business. Research by African Response last year estimated that stokvels in SA were worth about R25bn, with 8.6-million members in about 421,000 stokvels in 2015 alone. Clearly there is a market for stokvels, especially now that we are faced with tough economic times as South Africans.

These stokvels seem to be becoming more virtual than the once a month lunch meetings, having wine with the ladies in our stokvel uniforms.

Business Tech reported in January, of the eyebrows raised by banks on these “online stokvels” that are high yield investment programs (HYIP). In the article, Business Tech says that despite its reputation for being exactly that – groups such as MMM claim not to be HYIP, saying it is merely a “community of helpful citizens”.

As transactions are “person to person” and there is “no formal organization” and “no central bank account”, the group claims to be “perfectly legal”.

So, what is the problem here?

Schemes such as MMM do not hide the fact that there may be risks with joining the online stokvel. Every viable system has its own pluses, minuses as well as risks and MMM is no different. The most unfavorable thing that can happen to the MMM system, is its restart – restart in the event of a large-scale panic. Restarts in the Russian MMM occurred in 2011 and 2012, which was caused by both objective and subjective circumstances and reasons. However, it was not the collapse of the system, but only its restart. Immediately, everything starts over, and the participants have the opportunity to quickly recover their losses. It requires a certain psychological strength and a breakup of stereotypes, but such decision is safe enough. In addition, there are special concessionary assistance programs offered to those who were affected by the change, in terms of the amount of interest, bonuses and deposit terms, says MMM Global.

The downfall of the Republic of Bitcoin – Not so much of MMM

In the last few weeks, MMM has been under fire in the media, with naysayers warning its users of its possible collapse. Thousands of MMM Global participants across the country have been anxious about losing their investments following the network’s announcement last week that it was shutting down one of its schemes, known as the Republic of Bitcoin (RB).

MMM Global announced on its Facebook page just over a week ago that the RB, which offered monthly returns of 100%, was an experiment and it failed. “We regret to inform you that we have to close down the Republic of Bitcoin. It was an experiment, and, unfortunately, it failed.

Following these news, eNCA’s Money Man, Arabile Gumede took to the Twitter streets to educate South Africans on how to spot a Ponzi scheme and this is some of what he had to say:

Are you a member of an online stokvel?

Have you benefited or lost any money from Kipi or MMM? Share your stories with us, I would love to know. 

By @Keagi_M