During my controversial visit to Nairobi and then on to the Rift Valley some months back and which I talked about here, something very fascinating happened which I have not mentioned until now. (The visit was “controversial” because I admitted that it was the first time in many years that I was visiting the Kenyan capital and many of my readers felt cheated because they had always assumed that I was based in Nairobi.)
Anyway, during that visit, I sat at a dinner table somewhere in Nakuru with some relatives and listened as they explained to me in great detail how Kenyans were making a killing investing short term in some “solid investment companies.” One of the companies mentioned was Sasanet. They vehemently denied that it was a pyramid scheme and went on to tell me this amazing story about some smart lady who collects her cheques every month and then spends the rest of her time touring the world on some mercy missions and on holiday too.
What struck me was that I was not talking to some ordinary gullible wananchi on the streets. These were highly educated persons. The cream of society, so to speak. Some of the people on that table were the kind that regularly visited those capitals of the world the rest of us only hear about or see in movies and world news. New York, Washington, Paris, London etc.
Still, I only needed to ask a few questions and I was sure that what they were referring to were pyramid schemes (at the end of this article I explain how to tell a pyramid scheme instantly and the difference between pyramid schemes (illegal in most of the world) and Multi-level marketing (MLM) or Network marketing companies which is a very legitimate business. But what puzzled me even more was the fact that some companies mentioned like Sasanet had a very good image and were considered to be reputable businesses. Sasanet is one of the companies that had passed scrutiny and been licensed by the CCK Communication Commission of Kenya.
I asked where the money was being invested so as to yield such high returns and I was promptly told that it was being invested “off shore.” I could hardly prevent myself from giggling. Most of the returns “offshore” were usually very low, in the region of single digit percentages. Certainly not what would provide cash for the amazing returns of almost 20% for a brief 3 month periods being paid out by the likes of Sasanet in this case.
I took time to quietly explain to everybody why the investment schemes were definitely scams. But I could see that they were hardly convinced. After all I had no track record as a known investor. Who was I? In fact a couple of the people I was talking to on that table had leant me some cash during some hard times I had passed through not too long ago. And besides these “investment companies” were paying, and conmen never pay. And the investment contracts were even being drawn and signed with lawyers.
That last part really amused me but it was difficult to laugh because of the amounts of money that I was hearing being thrown around on the table, which just made me feel sick. Even if one wished bad things to happen to others you would have to be sick to wish for them to lose hundreds of thousands of shillings of their hard earned money just like that.
All this came flooding back to my mind yesterday when I heard that a large number of Kenyans were meeting at Garden Square Restaurant (on the grounds of the Kenyatta International Conference centre) to map out a strategy of how to recover their cash from Sasanet whose directors have vanished. One Asian businessman, a Mr Aman Sharma invested a staggering Kshs 10 million in what was clearly the Sasanet pyramid scheme. Others invested a couple of millions. Thousands invested hundreds of thousands.
What is really surprising is how all this happened right under the nose of the government without anybody asking any questions. It is difficult to believe that no government officials were paid to look the other way.
Folks should know that the first rule of investment is never invest anything that you are not prepared to lose. The reality with investments is that your investment can easily go either way—the higher the returns the higher the risks. And there are in fact very few specific investments with a guarantee (and these usually have much lower returns). However in the Sasanet scheme, investors were given contracts guaranteeing them a very high return. That is fraud, pure and simple. In a legitimate investment investors should be made to understand the basic rules of virtually any genuine investment.
I highly suspect that the so called “offshore destination” where these funds were being invested was in fact very local and more specifically, the Nairobi Stock Exchange. My suspicions here are based on the fact that most of these high profile pyramid schemes suddenly came crashing down at around the time the Nairobi Stock Exchange went through what analysts were calling “a correction.” But which was obviously much more than that. Thousands of speculator investors lost billions of shillings as the prices of many stocks suddenly tumbled. If my suspicions are true then this market upheaval must have dealt a serious blow to the cash-flow projections that had been put in place. And the irony of it all is that it is very possible the sudden invasion of the market by these short-term speculators could have contributed to the sudden dramatic fall in share prices. Just imagine the simple law of supply and demand at work. What happens when the market is flooded with maize from all the shambas around?
The thing with pyramid schemes is that they will always collapse at some point, and the directors of Sasanet must have considered themselves very smart investing the money in the stock exchange and then paying hefty monthly returns while retaining the principle. With some careful cash flow projections and relatively high short term returns (like what used to be enjoyed at the NSI) you can keep a pyramid scheme going for a long period of time. Long enough to fleece most Kenyans out of a fortune.
The Sasanet strategists were of course trying to re-invent the wheel by ignoring all the basic rules of investing. Like the critical need to diversify a portfolio and the basic rule that you cannot pay short term returns when entering into long term investments like property (which some insiders say Sasanet had already started venturing into. It was really just a matter of time before some small thing like the tumbling of shares at the Nairobi stock exchange was bound to bring everything crashing down.
What we now have in our hands are many Kenyan families going through a lot of suffering.
The main difference between a pyramid scheme and a genuine MLM program is the fact that there is no emphasis on the promotion or sale of any product. The emphasis is always on recruiting even more members and convincing friends and colleagues to join the scheme while focusing on a high short term return for joining or investing. Hardly any product is mentioned. Genuine MLM companies will emphasize on an excellent product that is useful and will encourage members to refer others only as a part of the business but certainly not the most important part of it all. In this way MLM companies are able to move huge volumes of products and this is what easily sustains the business even as some members get rich from building a large chain of referrals.