The year was 2006. The Kenyan economy was growing at more than 5% annually. Construction, information technology and transportation were recording phenomenal growth. People were buying so many vehicles that the government ran out of number plates.
2006 was the year that the Central Bank of Kenya posted a warning about “excessive liquidity” in the Kenyan economy. This meant hat there was too much money floating around. Where was this money coming from?
Well, with increased economic activity, Kenyans were earning more than they did a few years earlier. The Nairobi Stock Exchange was posting lucrative returns that turned ordinary people into millionaires. The global economy was booming as exporters made impressive returns. Meanwhile, Kenyans in the diaspora were sending billions of shillings in remittances to relatives back in Kenya.
With reduction in interest rates that began in 2003, bank loans were affordable to practically anyone who wanted. Banks were literally hawking loans on the streets. There were loans for housing, school fees and motor vehicles. At some point, banks were offering loans for people to buy furniture and televisions.
Essentially, the Kenya of 2006 was one where people had access to a lot of money. Which is just as well. Kenyans were looking for ways of ploughing the money into ventures that could generate even more money. Unfortunately, there was little knowledge of savings and investment opportunities. Most of the youth were experiencing this phenomenon for their first time, unlike the older generation who had gone through the 1970s coffee boom.
Ignorance on investing money largely contributed to the rise of pyramid schemes.
A pyramid scheme is one that promises investors very high rewards in exchange for recruiting new members. Everybody who joins a pyramid scheme brings some money that will be refunded with interest. For every member that you bring into the scheme, you get a commission on what that member has invested. For this reason, pyramid schemes tend to be very profitable for the initial investors. However, the people joining much later find it difficult to get recruits and therefore their returns are low. Eventually, the pyramid collapses because there are no new members bringing fresh cash.
The people who formed pyramid schemes in 2006 made billions of shillings by the time the organizations collapsed in 2007. The biggest pyramid scheme was called DECI and was founded by one George Donde and his sister, Mary Odinga. George Donde is brother to former Gem legislator, Joe Donde of the “Donde Bill.”
Other pyramid schemes were run by former legislators Andrew Ligale and Njeru Ndwiga. Kibaki confidante, Stanley Murage, has been implicated in pyramid schemes by a parliamentary taskforce headed by former Kitui legislator Francis Nyenze.
In total, Kenyans lost over Kshs34 billion (US$435,897,000) within two years to at least 160 pyramid schemes. The Francis Nyenze Taskforce found that many families broke up as a result of losing their savings. At least 20 people are known to have committed suicide due to the losses. A DECI manager in Nairobi was tossed out the window of Union Towers on Moi Avenue by irate investors who wanted their money back. The manager died.
Majority of the schemes were run by politicians and their allies. For this reason, there are hardly any criminal cases facing the perpetrators of the massive rip-off. There were other pyramid schemes initiated by entrepreneurs but the nature of Kenya is such that you cannot make money and “eat alone”. The masterminds of the pyramid schemes joined forces with politicians and senior police officers in order to cover their backs.
A case in point is a pyramid scheme that operated on Moi Avenue, not far from DECI. This scheme, which marketed itself as a “national merry-go round” was run by two women. Following its collapse, the women were arraigned in court where it emerged that police officers were demanding money to make the case “go away.” Needless to say, the case against the two women has disappeared from the public limelight.
It is widely believed that some of the funds raised from pyramid schemes were used by political parties in the 2007 election campaigns.
The Central Bank of Kenya has absolved itself from blame, saying that pyramid schemes are not banks and therefore fall outside its regulatory structure. The pyramid fraudsters were shrewd enough to register their organizations as co-operative societies under the Ministry of Co-operative Development. They knew only too well that the Ministry of Co-operatives lacks the capacity to monitor massive financial transactions involving millions of accounts. Incidentally, the Minister of Co-operatives at the time – Njeru Ndwiga – has also been implicated in pyramid schemes.
To be fair to the Central Bank, it did issue warnings through the press discouraging Kenyans from investing outside the banking system. The pyramid schemes dismissed the warnings as “jealousy by mainstream banks.” and urged Kenyans to ignore the Central Bank. Because of inadequate knowledge on banking and finance systems, people preferred believing the pyramids.
The Central Bank and the financial sector in general should work hard to increase awareness on the many investment options available to Kenyans. This will ensure that the public does not fall prey to fraudsters taking advantage of the human need to increase personal wealth.
Filed under: Analysis, News Tagged: | central bank of kenya, corruption, DECI, francis nyenze, George Donde, kenya, Mary Odinga, mwai kibaki, nairobi, njeru ndwiga, parliamentary taskforce on pyramid schemes, pyramid schemes, Stanley Murage