The state of Ponzi schemes in Nigeria

What drives ponzi scheme participation in Nigeria?

Ponzi or pyramid schemes are everywhere. In 2016, one of the largest international Ponzi schemes, the Mavrodi Mondial Movement (MMM), set up shop in Nigeria, and about three million people joined. Another pyramid scheme, Ultimate Cycler, reportedly registered 2,000 people every week until it shut down in December 2016. And despite reports that people lost about ₦18 billion to MMM, a new scheme, Twinkas, kept attracting participants, including those who have lost money before.

The media has documented these developments, dutifully pointing out Nigerians' gullibility, but something about this characterisation 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?

A survey conducted by NOI polls helps us answer this question. About 55% of Nigerians who participated in ponzi schemes did so because of quick turnover, while 26% participated because of poverty. This suggests that the main driver for participation is outsized financial gain.

Now we’ve looked at what the main drivers of ponzi schemes are, let us see how ponzi schemes actually work.

How Ponzi schemes work: 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% 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 makes no secret that participants are not investors and will receive money only from other participants. This goes against the narrative that ponzi scheme participants are naive. 

As seen from the above, Ponzi schemes are not designed to attract and deceive people looking for "proper" investment opportunities. So, what attracts them if investing is not the incentive for participation? 

Why do Nigerians still participate in Ponzis?

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 participating. So, information campaigns to sensitise people against Ponzi schemes may have actually made these schemes more popular and, thus, more profitable!

To give some context, the Nigeria Deposit Insurance Corporation (NDIC), the government agency responsible for insuring depositors' funds, says at least ₦911 billion has been lost to ponzi schemes in the past 23 years. That is over $2 billion using the official exchange rate as of December 2022. 

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 in 2018. 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, and over 39 million people were unemployed or underemployed as of Q3 2020. With their livelihoods already at risk, people look more willing to try their luck with Ponzi schemes as a potentially more lucrative bet. 

Frequently Asked Questions

What is an example of a Ponzi scheme?

Mavrodi Mondial Movement (MMM) Inc is a great example of a Ponzi scheme. In 2016, the popular international pyramid scheme was launched in Nigeria and immediately attracted three million Nigerians who lost about ₦18 billion when it crashed in December of the same year. 

Why is it called a Ponzi scheme? 

Ponzi schemes got their name after Charles Ponzi. In 1920, Charles started a business in Boston to promote a scheme promising a 50% return on investment in 45 days. He extorted $10 million out of participants before getting caught. 

Why do Nigerians still participate in Ponzi schemes?

Nigerians still partake in Ponzi schemes despite the apparent disadvantages because they approach these schemes with a gambling mindset. This isn’t surprising as Nigerians have demonstrated an increased propensity to gamble. Also, some Nigerians may believe they won't lose money even if others do (they view their risk as different to what it actually is).