The Return of Wonder Banks

Wonder banks, the local moniker for Pyramid or Ponzi schemes, are back in public consciousness. The schemes tend to proliferate at the extremes of the business cycle – booms and recessions. Mainly driven by greed in the former case and by desperation to escape financial difficulties in the latter case. The last time they were popular was in the boom period between 2005 and 2008. The Securities and Exchange Commission (SEC), the Central Bank of Nigeria (CBN) and other regulators of the finance industry have recently issued warnings to the public against patronizing unlicensed financial and investment firms.

There are many variations of the schemes but they all typically promise high returns on investment significantly beyond what is available from a range of products offered by licensed institutions. Some schemes offer as much as 10% to 20% interest per month – that is a staggering 120 to 240% per annum. The first investors normally get their returns as promised and then spread the great news to people in their network. The good story spreads quickly and more people rush in to enjoy the spoils. The party then gathers momentum as money from new investors allows payments to be made to old investors. This continues until the new money coming in cannot sustain interest payments to investors. This is a signal to the promoters that the bubble is about to burst and it is time to disappear. Participants wake up one morning to find the offices of the promoters closed and their money was gone.

The latest variations consistent with the current economic mood, present the schemes as economic empowerment tools to help one another survive the recession. Naturally, many of these schemes are now moving online to lure a younger demographic and to escape regulators. Generally, you are invited to contribute a certain sum of money. You are then required to introduce others to contribute and in return receive a certain percentage, say 30%, as your share. And on it goes until it bursts. A few months ago, I tried to dissuade a friend from joining such a scheme. Interestingly, I received an email two days ago inviting me to join a similar scheme by paying N3,500 as admission fee. In return, I will receive 30% of the admission fees of all those I introduce plus a chance to win a plot of land, car etc. The mail included a full address in a shopping complex in Lekki, Lagos. Suffice to say I deleted it.

The reality is such schemes are scams solely designed to enrich the promoters, as they are not based on any underlying legitimate and productive business. And even if there is an underlying business, it is merely a smokescreen as annual returns of 120% and above are impossible. For example, a review of the accounts of Nigerian publicly quoted firms reveal that return on equity is on average below 20% per annum while average dividend yield is a single digit. Savings accounts tend to pay 5% or less, while Treasury Bills and government bonds yield below 20% – even in this period of high inflation.

Therefore, save and invest only through licensed institutions else you risk losing your money, damaging your relationships and reputation. You can find the list of approved companies and products on the websites of SEC www.sec.gov.ng, CBN www.cenbank.org, the pension regulator  www.pencom.gov.ng and the insurance regulator www.naicom.gov.ng.  If you have a business and need funds to start or grow it, prepare a business plan and approach licensed financial institutions or friends, family and others in your network to fund it. If you have financial difficulties and need help, you are far better off asking assistance directly from family and friends rather than luring them to participate in a scam.

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