Large-scale financial crimes such as pyramid and ponzi schemes that promise high returns on dubious investments are always big news. Clearly they can lead to devastating losses for consumers, the great majority of whom typically lose all the money they invest. This in turn can threaten gains in financial inclusion by eroding potential new consumers’ confidence in the formal financial system. Pyramids and ponzis can also create major headaches for policy makers, whom the general public often blames for having failed to respond quickly enough and to “do something” to stop the fraudsters and nip the scam in the bud. To cite just one example, in February a group of victims who lost money in pyramid schemes sued the Central Bank of Kenya and other government authorities for failing to adequately regulate the banking sector.
But is this issue a relevant and significant concern for financial inclusion or is it a distraction? Should those concerned about financial inclusion of the poor rather leave this for others to consider? With this post we are launching a special series on pyramid schemes through which In this we will examine this question through several different lenses.
The first concern is whether the victims of pyramid and Ponzi schemes are generally just better-off people looking for “get rich quick” schemes for their extra investment funds or if lower-income people are also targeted or caught up.
The second question is whether such schemes indirectly affect the context for financial inclusion, either because they masquerade as providers of legitimate access to finance for underserved consumers (for example, when they are or appear to be a microfinance institution or a financial cooperative), or because their collapse leads politicians, journalists, and the general public to assume that financial inclusion somehow causes financial instability.
And the final question focuses on what can be done: even if this type of financial crime creates significant problems for financial inclusion, is there anything in the domain of financial consumer protection or financial capability that policy makers can do to prevent them or minimize their impacts, especially on lower-income consumers?
This blog series will address each of these questions and explore the roles and responsibilities of policy makers, law enforcement authorities, financial sector authorities, legitimate financial service providers, and other key actors such as the media have in protecting consumers against these schemes. We will explore whether pyramids affect poor consumers in developing countries, drawing on new consumer data from Kenya. Our guest bloggers, Nicola Jentzsch (Senior Research Fellow) and Louis De Koker (Professor of Law, Deakin University, Australia and currently a visiting scholar at George Washington Law School), will provide a typology of financial crimes and the specific nature of pyramid and Ponzi schemes next week.