Description of Albanian Pyramid Scheme (2)

A pyramid scheme is a deceptive method of obtaining money that involves enlisting the
help of an ever-increasing number of "investors". The first promoters bring in investors, who
bring in other investors, and so on. The system is referred to as a "pyramid" since the number of
investors expands with each phase. The narrow group of elite promoters needs a solid structure
of later investors to fund the plan by paying out rewards to the early investors. In a classic
pyramid scheme, a fund or firm entices investors by promising them extremely large profits,
which are returned to the first investors from profits earned. The scheme is unstable from the
start, with liabilities exceeding assets. Consequently, it eventually thrives as knowledge of the
good returns propagate and therefore more investors are attracted. Several individuals are
pulled in by the huge rewards, and in certain circumstances by the controllers' spectacular
investments and conspicuous expenditures, and the scheme increases until the interest and
principal due to the early investors outweighs the money put in by new investors. A scheme may
increase interest rates to entice new investors, but the increased interest payments will soon
require it to raise rates again. The high rates gradually raise suspicions, or the scheme
becomes reluctant to generate interest payments. When investors try to withdraw their funds,
they learn the truth about the plan, which ends quickly—usually with the operators committing
embezzlement if they are not apprehended beforehand.
Pyramid schemes operate on the premise that amount earned in by later investors is
utilized to pay earlier investors unrealistically larger returns. There are typically three basic
categories of pyramid scheme:
1) Classic pyramid scheme— contributors try to gain money exclusively by attracting new
participants, which usually occurs by: 1) the recruiter guarantees a high interest rate in a
short time; 2) no actual type of product presented; and 3) the central emphasis is on
attracting new members.
2) Multi-Level Marketing Pyramid Scheme— this framework illustrates the actual sale of
products or services. Participants, on the other hand, are not required to close any
transactions. They must recruit members beneath them in order to gain revenue.
3) Ponzi Schemes— finance deception in which revenues obtained from new investors are
used to pay old investors. Operators of Ponzi schemes frequently offer to invest your
funds and earn high returns with very little risk. However, the perpetrators in many Ponzi
schemes do not invest the money. Instead, they utilize it to compensate previous
investors, with the possibility of keeping part for themselves.
The pyramid scheme phenomena in Albania is noteworthy because of its exceptional
magnitude in relation to the growth of the economy, as well as the political and social
ramifications of its collapse. The present value of the pyramid schemes' liabilities reached over
50% of the country's GDP at their peak.

Period or Duration of Albanian Pyramid Scheme (5)

Further pyramid schemes emerged in early 1996, attracting additional depositors, raising
interest rates, and further perplexing regulators. Previously, several large corporations
controlled the unstructured deposit-taking market. VEFA, Gjallica, and Kamberi, the three
largest enterprises at the moment, all provided interest rates of 4 to 5 percent per month,
climbing to 6–10 percent in the first half of 1996, as indicated above; all three companies had
major actual investments and activity. In 1996, two additional schemes, Xhafferi and Populli,
joined a preexisting but extremely prominent one, Sude, which provided greater interest rates
(12–19 percent per month in May 1996) and had no underlying investments.
Throughout the second quarter of 1996, Kamberi increased its monthly interest rate to
10% in July. Populli started to offer over 30% a month in September. In a penultimate outburst
in November, Xhafferi pledged to triple depositors' money in three months (a monthly equivalent
rate of 44 percent). The face value of obligations had reached US$1.2 billion by November.
Even yet, these figures fall short of capturing the hysteria that engulfed Albania at the time.
The residual pyramid schemes collapsed over the course of four months, toppling the
Democratic Party administration and bringing Albania into chaos.

Outcome of Albanian Pyramid Scheme (7)

The Albanian pyramid schemes were exceptional in that they were substantial enough to
have an impact on the entire economy. Nonetheless, the adverse losses of their growth and
collapse appear to have been modest, given that the face value of their obligations was so large
—roughly half of GDP in 1996. They're also hard to distinguish, in part because documentation
on Albania's actual economy is limited, and in part because their demise had far-reaching
political and social consequences, including the eruption of civil unrest, which had a significant
impact on the economy.
The Albanian pyramid scheme phenomena had significant social consequences, which
are still unknown. Over 2,000 people died as a result of the events that followed their implosion.
Thousands more people became impoverished as a result of their ill-advised investments in the
schemes or the devastation of their property as a result of the turmoil that followed. A
government, although one of disputed constitutionality, was deposed. Arms taken during the
crisis have been used in armed robberies in Albania, as well as delivering a constant supply of
weaponry to Albanian rebels in Kosovo. The implications on Albanian confidence are far less
palpable.
Albanian residents, who also had spent a total of $1.2 billion (an average of $400 per
person across the country) by January 1997, flocked to the streets to protest. Thousands of
individuals began regular protesting in February, seeking compensation from the government,
which they claimed was prospering from the schemes. Anybody else who hasn't been on board
was yelled at, castigating one another of someone being communist loyalists who could not
even tweak to this flourishing modern paradigm.
Albania was a surprisingly complacent country even before global recession:
underprivileged, chronically troubled by major governance and economic issues, but aware and
proud of having made rapid pressure since the collapse of Communism. Albania was a
considerably more tranquil place for a few years just after crisis. The Albanian people have a
high level of resilience, which has been sorely tested in the previous era. However, the pyramid
scheme scandal was a devastating failure for Albania, serving as a stark reminder of the
financial consequences of fraud gone undetected.
Charles P. Kindleberger; Robert Z. Aliber. (2011). Manias, Panics, and Crises: A History of
Financial Crisis
https://www.researchgate.net/publication/48320596_Manias_Panics_and_Crises_A_History_of_
Financial_Crises
Adam Hayes. (2021). Pyramid Scheme.
https://www.investopedia.com/terms/p/pyramidscheme.asp