In his twenties, the son of a famous religious figure had no idea that his brainchild idea, supported by his father’s revered standing, would become one of Pakistan’s worst financial frauds. A Ponzi scam involving billions of rupees spread quickly, propelled by little more than family hearsay and word of mouth. In just a few months, billions of rupees in cash were collected from unsuspecting victims across the country through an organized network of offices and so-called directors, who ensured funds were collected in cash, bypassing all financial regulations that might have triggered an alert. A profit of 8% to 15% each month was promised to investors. After some initial investors received the profits, it initiated a gold rush scenario among others. To make it more enticing, it was advertised that only their profits were Sharia-compliant profits and claimed that traditional banking was “HARAM.” Meanwhile, the money was squandered on lavish trips to Thailand, luxury vehicles, and fancy homes, all without any legitimate business, a textbook example of a Ponzi scheme. The scam eventually collapsed in a year and a half, leaving thousands of middle and lower-income people with nothing but broken dreams and empty pockets.
Since the dawn of humanity, humans have an innate desire for riches, sometimes leading them to go against their intuition and common sense. This desire is the principal factor on which scammers build the foundation of a Ponzi scheme. Although Bernie Madoff succeeded in exploiting these same sentiments for years, creating the largest Ponzi scheme in history, his case was a rarity, especially considering the stringent financial market regulation and oversight by the SEC. These Ponzi schemes are more common in developing countries. To understand why this happens so often in these countries, we must look into the psychological, social, and governmental factors specific to developing countries.
Scams like Ponzi schemes are widespread worldwide, yet they seem to have a bigger impact in the developing countries, where the differences in socio-economic status are more salient. In Pakistan, for example, increasing income disparity is the major factor for Ponzi schemes to thrive. Why do these frauds thrive in these nations? Three main reasons are: strong family bonds, the manipulation of belief by the misuse of religious ideology, and the inefficient state regulatory bodies that inevitably allow these kinds of frauds to flourish right under their noses. In the majority of developing countries, families are at the core of any social and financial activity. Due to this dependence, they often trust each other more and overlook any warnings from the authorities and media. However, this same trust backfires when unsuspected family members endorse, based on their own experience, other family members a quick money-making scheme. This eventually becomes the catalyst for the spread of the scam. The confidence of family members leads people to disregard the signs of scams, and it keeps on going until it affects everyone in the family.
This is not an issue of Pakistan alone. Most of the less developed countries are experiencing the same problem. How can one dismantle the chain? How does one maintain trust without there being a danger of becoming a victim?
Another factor contributing to the proliferation of Ponzi schemes is the exploitation on religious grounds. Religion plays a central role in the lives of many people in developing countries like Pakistan. The trust people have in certain religious leaders and institutions sometimes makes them vulnerable to scammers who position their schemes as “Sharia compliant.” Scammers exploit the investors by falsely advertising that their so-called business is strictly based on the principles of Islamic Sharia and conveniently declare all other conventional interest-based financial systems as “Haram,” hence manipulating the minds of innocent people who otherwise would not have invested.
Another major factor for the spread of fraudulent schemes in developing countries like Pakistan is the widening income gap between the rich and the poor, and lack of economic opportunities creates a desperate search for wealth resultantly making people more vulnerable to Ponzi schemes. In countries where a large percentage of the population lives in poverty or near poverty, people are easily swayed by promises of quick financial gains. The government’s failure to create a fair, transparent, and accessible economic system has resulted in high inflation, job insecurity, and a growing wealth gap between the rich and poor, which is the root cause of corruption in developing countries. These conditions make it difficult for people to improve their financial situation through legitimate means, and Ponzi schemes with their false promises of profit look very tempting to them.
Also, the lack of oversight in the informal economy, which is a big part of the financial landscape of many developing countries, makes it unregulated and thus an ideal place for scams to thrive. People go for high returns outside traditional financial institutions because doing business is full of unnecessary hurdles like the requirement of multiple unnecessary NOCs from different departments. In these departments, officials ask for bribes for the NOCs and thus fuel corruption and make it almost impossible for citizens to earn an honest and livable income.
In short, the problem of Ponzi schemes in countries like Pakistan is driven by deep-rooted psychological, social, religious, and economic hardships. Vulnerable people are regularly exploited on different grounds like familial trust, religious beliefs, and financial issues. Given the historical context, these frauds are likely to continue unless the government takes some bold steps which include financial education through media for citizens, accountability, and tighter monitoring, so we can have informed communities with a safe financial environment. Tougher laws and faster unbiased prosecution are also required to ensure that the risks of fraud for scammers outweigh the advantages. Without these measures, these Ponzi schemes will keep on popping up year after year, perpetuating the misery for unaware citizens.
The writer is an economist and currently serving as a White-Collar / Financial Crimes Investigator with Federal Government.
X @ Umair_fci
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