Yesterday one of the dailies ran the headline “Investors lose KES 100 million in fresh pyramid-like scandal.” In brief the story is about hundreds of investors who have lost more than KES 100 million in a scheme ran by fraudulent agents working from within a Nairobi-based insurer’s offices. The scheme dubbed “Mavuno” attracted investors with fat returns that rapidly popularised the product. The investors earned the promised returns for a year however subsequent payments are unlikely as the agents who recruited the investors are nowhere to be found.

The questions we should ask upon reading this are: What is a pyramid scheme? And whether this is a pyramid scheme?

What is a pyramid scheme?

A pyramid scheme is described as a non-sustainable business model that involves promising participants payment rather than supplying any real investment or services to the public from which to make money to pay the participants the promised return. The main characteristic of a pyramid scheme is that participants only make money by recruiting more members.

The essential idea is that a "con artist" Mr. X, makes only one payment. To start earning, Mr. X has to recruit others like him who will also make one payment each. Mr. X gets paid out of receipts from those new recruits. They then go on to recruit others. As each new recruit makes a payment, Mr. X gets a cut. He is thus promised benefits as the "business" expands.

Is this a pyramid scheme?

In this Mavuno case the conman is the chief agent who, with the success of the scheme, became the star of the company (as stated in the article). The participants are the investors who put their money into the scheme, as much as KES 10 million. The attractive return that captivated investors is the return the agents promised the investors, as much as 7% to 10% weekly or monthly.

Consequently the scheme seems to have worked as follows; Agents approached investors to put their money into the Mavuno scheme, the money then travelled up the hierarchy to the chief agent and returns were paid downwards. Once the scheme became too large to control the main agent took off with the investors funds which the article describes to be KES 100 million.

Therefore, for all intents and purposes this Mavuno scheme seems to have been a textbook pyramid scheme.