The Effects of Pyramid Schemes on Microloan Recipients: An Example from Peru

By Courtney Kemps, KF8 Peru

Last week I spoke with Patricia Isidro, supervisor of the loan officers in Manuela Ramos’s Pucallpa office, about a wave of pyramid schemes which seriously affected many of the institution’s borrowers in the Pucallpa area over the past year. This “pyramid game” (juego de la pirámide), as it is known here, can take several different forms, but most commonly each person recruits two others to contribute 300 soles (about $100). These two each recruit two more, and so on down the line. The money is transferred up the pyramid to the person at the top, who walks away with 2400 soles. The people immediately below this person then move up to the top spot. Once the chain of money transfer breaks and the scheme collapses, however, everyone in the lower tiers ends up losing.

It is not clear who brought the pyramid game to Pucallpa (other areas where Manuela Ramos operates did not appear to be affected), but this series of schemes impacted many area residents, not just those receiving loans. With respect to Manuela Ramos, Patricia estimated that such schemes affected 80 to 90% of the institution’s Pucallpa-area borrowers between November and March! The majority of these women lost their capital for investment in their businesses and ended up unable to make their monthly loan payments on time. In the hopes of making some quick, easy money, the poorest borrowers were the worst off as many had not only given up their investment capital, but also many of their household items in order to play the game.

Dolly, a Kiva borrower, spoke openly with me about the pyramid game and how her involvement in it this winter created great difficulties for her family in subsequent months. Dolly is a 42-year-old single mother and has been working with Manuela Ramos for four years. She runs a small food stand in the early mornings, selling cakes, breakfast sandwiches and juices out of her home. When Dolly first played the game in January at the invitation of a friend, she “won” a few hundred dollars. Encouraged by this, Dolly lent out her winnings to others so they could play the game and also invited several more people to join. As it turned out, the people Dolly invited did not receive any winnings and soon began knocking on her door, asking for the return of the 300 soles they had invested. Dolly had passed their money on up the pyramid and had nothing to give them. Additionally, no one to whom she had lent money to play the game ever paid her back. Embarrassed by the fact that her invitees constantly came by to ask for the return of their money, Dolly retreated into her home and stopped working. She struggled to pay back all her loans and still maintain enough to feed her family. Not only did she have credit from Manuela Ramos, but also from another microfinance institution and a commercial bank. Soon the other microfinance institution took her refrigerator as payment of her debt and the commercial bank came knocking at her door, threatening to seize her house. For four months Dolly struggled in this situation. At this time she is back on her feet, working extra hard at her restaurant. She no longer has outstanding debt with the other microfinance institution, is working with a small loan of 500 soles (about $165) from Manuela Ramos, and is slowly paying back the commercial bank and her invitees who each lost 300 soles in the pyramid game. Dolly described this game as a “plague” or a “fever” that took over Pucallpa for a good part of this past year. Life isn’t easy for Dolly right now, but she feels better and is successfully managing her household and business.

Although recruitment into such schemes appears to have ended for the time being, both Manuela Ramos staff and borrowers will continue to feel the ripple effects for some time. Loan officers have had to work extra hard in recent months to track down borrowers who have gotten seriously behind in their loan payments. Such tasks are very time consuming for Manuela Ramos’s loan officers, who already have more than enough work managing their high load of communal banks. Additionally, due to Manuela Ramos’s communal bank system, both those borrowers who became involved in the pyramid game and many who did not will be affected by the capital losses for many months to come: If one borrower defaults on her loan, all of her fellow communal bank members must wait until she pays or puts something up as a guarantee in order to receive their next loan. Lack of payment also means that interest rates go up for the group as a whole. For an individual borrower, getting behind on payments (even by just a few days) means that her loan size will stay the same or even shrink during the next cycle. All of these consequences of non-payment or late payment mean that many Manuela Ramos borrowers will face a greater challenge in growing their businesses for months to come.

Susceptibility to pyramid schemes like the one described above, and vulnerability to their negative consequences, are, I think, often greater for poor, hardworking people to whom a few hundred dollars means a whole lot. Many microloan recipients fall into this category. If you’d like to learn more about Manuela Ramos’s microfinance program, click Here.

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