Ullah2020 PDF
Ullah2020 PDF
Ullah2020 PDF
https://www.emerald.com/insight/1359-0790.htm
Investors’
Determinants of investment perspective on
decision in a Ponzi scheme: the Modaraba
scam
Investors’ perspective on the
Modaraba scam
Irfan Ullah
Department of Higher Education, Government College of Management Sciences,
Thana, Pakistan, and
Wiqar Ahmad and Arshad Ali
Department of Management Studies, University of Malakand, Chakdara, Pakistan
Abstract
Purpose – This paper aims to identify the key patronage factors that encouraged the public for investment
in the Modaraba scam – a Ponzi scheme perpetrated in Pakistan with a whim of Sharīʿah-compliant business
and intermediation of religious clerics.
Design/methodology/approach – In a qualitative research, semi-structured interviews were conducted
with the investors of the scam followed by thematic analysis to conclude on the subject matter.
Findings – The results reveal numerous stimuli, thematically categorized as the monetary stimulus,
religiosity stimulus and lubricants, which mobilized investment towards the scam. In general, a lucrative rate
of return on investment and personality of the agents, being religious clerics, were the two prominent reasons,
which convinced unanimously all investors. In particular, the religiosity stimulus (agents’ personality and
Sharīʿah-compliant business) was a novel and eye-catching slogan of the scheme.
Originality/value – Keeping in view the amount of scam and number of victims, this research is a robust
attempt to conclude on the determinants of investment decision in the Modaraba scam.
Keywords Ponzi scheme, Investment decision, Modaraba Scam
Paper type Research paper
Introduction
A rational investment decision is an important function of individual investors and business
managers. To gauge this rationality, a common yardstick is to receive more than the
principal investment (Arnold, 2005). Accordingly, an investment opportunity that offers a
higher rate of return, more is the chance of its acceptance (Tennant, 2011; Zhu, 2010).
However, at times, due to the prevalence of information asymmetry, the offers of lucrative
return entice the investors to invest fallaciously in fraudulent schemes that are designed
principally to embezzle public money. Such deceitful investment schemes have prevailed at
different times in varied forms all around the world, but the most common one among them
is the Ponzi Scheme (Wipada et al., 2009).
In Ponzi schemes, con artists collect public money as an investment in the schemes with
the promise that the investors would accrue a hefty rate of return with zero risks (Pozza
et al., 2009; Griffin, 2011; Searcey, 2014; SECP, 2004; Nolasco et al., 2013). In accordance with Journal of Financial Crime
the pledge, profit is distributed among investors periodically at the promised rate and time © Emerald Publishing Limited
1359-0790
(Burke, 2009), but the distribution of profit does not last longer, it continues merely in the DOI 10.1108/JFC-02-2020-0027
JFC early stages of the scheme to entice more and more investors for contribution into the
scheme (Irfan et al., 2018; Tsai, 2009). The scammers associate a higher rate of return as the
product of genuine earnings of the unique business ideas and operations (Pozza et al., 2009;
Ionescu, 2010), but in reality, such schemes either perform scant or no business operations
(Pozza et al., 2009; Shechtman et al., 2009). The periodic profit, which is distributed among
the investors, actually returns of investment rather than return on investment (Drew and
Drew, 2010; Searcey, 2014; SECP, 2004; Yang, 2010).
Historically, Charles Ponzi [1] is considered as the prime mover [2] of Ponzi schemes (Zhu,
2010; Drew and Drew, 2010). He duped investors with international postal reply coupon
scheme in 1920 and as a consequence, such schemes earned the prefix “Ponzi” from the
name of its founder (Furman and DeJoy, 2009; Wells, 2000; Artzrouni, 2009). He devised to
purchase the international postal reply coupons issued by the United Postal Union in Italy
and sold them in the USA to take the advantage of arbitrage through the purchase and sale
in different countries at varied price and used the benefits caused by currency devaluation
after First World War (Buckhoff and Kramer, 2011). He claimed 400% earnings for
transacting postal coupons (Walsh and Spalding, 2011) and, in turn, he offered to investors
50% return on investment in 45 days or 100% return in 90 days (Furman and DeJoy, 2009;
Buckhoff and Kramer, 2011; Walsh and Spalding, 2011).
During the eight months period of scam, he collected 20m dollars from investors in a way
that earlier investors were paid the promised return out of the investment of new investors
(Wells, 2000; Burke, 2009). To look into the assets of Charles’ business, he had only 30
dollars[3] worth of coupons at the time when his fraud uncovered (Wells, 2000; Burke, 2009).
Although, Lewis (2012) claimed that this scheme was required to have purchased 160
million coupons to be legitimate. To look into the perverse rate of profit of this scheme,
Burke (2009) claimed that banks were offering only a 5% return on savings accounts when
this scheme was operational.
Gini (2004) argued that generally, it is perceived that change is constant, but at times we
see certain things remain unchanged. This is very much true of Ponzi Schemes, as they
emerge in nearby the same fashion again and again. As Charles’s Ponzi scheme, different
forms of schemes emerged in different countries of the world[4] with no exception to
Pakistan. In 2005-2007, Double Shah[5] swindled the public through a money multiplication
scam (Karal, 2012). Yet again, despite various small schemes, history repeated another mega
financial scandal namely the Modaraba scam.
Modaraba scam was a financial fraud perpetrated in Pakistan under the umbrella of
Modaraba[6] form of business. It emerged with the conception of Sharīʿah-compliant
business, proceeded through the intermediation of religious clerics and it targeted the
middle age educated public having low or no prior experience of investment (Irfan et al.,
2018). The National Accountability Bureau (NAB) of Pakistan categorized it in the mega
scams by reporting seven cases of Modaraba scam in a list of “50 cases of financial scams”
(NAB, 2015). The scam swindled up to PKRs. 500bn from 13,000 victims by offering them a
lucrative rate of return on investment (Irfan et al., 2018; News, 2013).
Irfan et al. (2018) summarized the operational strategy of Modaraba scam as: the raising
of funds through trust anchors-religious clerics of each locality, diffusing believable
business ideas to convince more and more investors for contribution into the scam and
maneuvering the distributed profit tactfully. The scam progressed very well as long as it
added new investors, but after paying a couple of periodic returns on investment, the scam
discontinued the payment of profit and subsequently, the agents vanished (Irfan et al., 2018).
Keeping in view the huge amount of scam, a large number of investors and the due
consideration of NAB, this research aims to find out the key patronage factors that induced
the investors to contribute substantially to the Modaraba scam. For this, semi-structured Investors’
interviews are conducted through a snowball sampling method with the investors of the perspective on
scam in different parts of Khyber Pakhtunkhwa (KP)[7] followed by rigorous thematic
analysis.
the Modaraba
scam
Literature review
The operational design of Ponzi schemes is based on the “to-rob-Peter-to-pay-Paul”
principle, which means honouring the claim of Paul needs to rob Peter (Walsh and Spalding,
2011; Burke, 2009). Such schemes emerge with a seeming ideal business idea having the
potential to generate high yield (Wilkins et al., 2012) and promise the investors a high rate of
return on investment (Pozza et al., 2009). To raise funds for the scheme, an intermediary role
is assigned to trustworthy agents of the society, in turn, for commission at an agreed-upon
rate (Irfan et al., 2018).
The agents collect public money, channel it to the perpetrators and distribute profit to the
investors as soon as received from the initiator of the scheme (Irfan et al., 2018). In reality,
returns are paid out of the deposits of new investors (Tsai, 2009) because, on the ground,
such schemes perform either scant or no business (Pozza et al., 2009), but the distribution of
profit is managed tactfully to convince more and more potential investors. The success and
life span of such schemes depend upon the contributions of new investors (Yang, 2010) as
the total funds consist of investor deposits only (Pozza et al., 2009). The proceedings of the
scheme are not properly documented and it just travels by word of mouth (Lewis, 2012). To
mislead the investors, regulators and monitoring authorities, the runners of such schemes
prepare fake books of accounts with a large misrepresentation (Kotlikoff, 2009; Shechtman
et al., 2009).
A key element of Ponzi schemes is the attractive rate of return on investment (SECP,
2004). Tennant (2011) asserted that investors prefer persistent and hefty return
opportunities. Hence, Ponzi schemes capitalize on investors’ psychology. For example,
Charles Ponzi offered investors to double their money in three months (Furman and DeJoy,
2009; Buckhoff and Kramer, 2011; Walsh and Spalding, 2011). Brennet, in the New Era
Philanthropy, offered to the investing organizations to double their money in six months
(Pressman, 1998). Those rates of return were very unrealistic. Conversely, the rate of return
in Madoff’s Ponzi scheme[8] was somehow reasonable ranging from 10% to 13% per annum
consistent in any situation (Lewis, 2012; Buckhoff and Kramer, 2011). Though, Artzrouni
(2009) asserted that Madoff’s return was also unrealistic keeping in view the global financial
crisis and recession of 2008.
In Pakistan, Double Shah (Rs. 10bn to Rs. 40bn Ponzi scheme in 2005-2007) also offered
investors to double their money in 15 days, but in the later stages of the scheme, doubling
the money was extended to 70 days (Commonor, 2007; Karal, 2012). Even the Modaraba
scam offered Modaraba scam offered to the investors a hefty rate of return ranging from
60% to 120% annually (Irfan et al., 2018).
Next to the rate of return, persistency of return is also an appealing factor in such
schemes. Pressman (1998) asserted that New Era paid the depositors a substantial rate of
return for many years. Although, Tsai (2009) found that only earlier investors in the scheme
were paid regularly. However, Deason (2012) and Wilkins et al. (2012) asserted that
incessant payment to earlier investors did motivate the public for investment as they saw
those earlier investors received return well in time as promised.
Olsen (2008) declared trust as an important component for capital markets. However, it is
unfortunate that Ponzi schemes exploit the mutual trust of the people in each other owing to
the fact that they are members of the same religion, profession, ethnicity and age, etc.
JFC (Carvajal et al., 2009; Sarna, 2010; Jacobs and Schain, 2011; Buckhoff and Kramer, 2011;
Frankel, 2009). Besides, social networks having the affinity bring new investors to the
scheme (Hurt, 2010). This affinity-based trust encourages the perpetrator to exploit the
human psyche to trust group mates or cheat your own community. Frankel (2009) asserted
that investors being a member of the same organizations and having trust in each other led
to the success and length of the Ponzi scheme. Because the fellow feeling compels the
investors to rely on word of mouth rather than shreds of evidence (Wilkins et al., 2012;
Mancl, 2012).
Ponzi schemes sometime last longer than its capacity because investors prefer to re-
invest the periodic profit again and again in the scheme rather than receiving it as a
dividend (Burke, 2009). For all such investment and re-investment, investors only receive
fake paper earnings and accumulated investment statements (Buckhoff and Kramer, 2011).
During the investigation of Madoff saga, it was discovered that investors were sent monthly
statements exhibiting profitable investment performance, despite the fact that no activity
was conducted during the past 13 years (Hurt, 2010). However, in the initial phase of the
scheme, withdrawal requests of investors for profit and principal amount, if any were met
frequently (Lewis, 2012).
In addition to that, being a con artist to impress and assure the people, Madoff even
refused to take the money of some investors or to have a waiting period for enrolment in the
scheme (Zhu, 2010). Even, at times, investors were supposed to beg to Madoff to take their
money and invest in the scheme (Lewis, 2012). Henceforth, investors were deeply impressed
by the so-called fair play. Perpetrators in Ponzi schemes also tried to rope in the reputes of
the society to motivate others to invest in. When prospective investors noticed that people
with good standing were members of the scheme and had invested in too, it reduced their
hesitation to become an investor (Benson, 2009). As a matter of fact, such names served as
role models for enticing new investors into the scheme.
Furthermore, Ponzi’s architects spent nothing on the advertisement of a scheme to the
public. Benson (2009) explains that without any doubt, earlier investors in the scheme were
awarded good returns. Resultantly, early investors became an effective marketing tool by
serving as songbirds (Buckhoff and Kramer, 2011). Such songbirds praised the scheme
everywhere that automatically stimulated the contribution of other investors in the scheme.
The personality of scammers and agents, and their reputation in public contributed
substantially to the success and length of Ponzi schemes. To encourage people to invest, Ponzi
schemes exploited a “good guy” perpetrator (Wilkins et al., 2012). For example, Madoff was a wall
street icon for years (Buckhoff and Kramer, 2011) and for that reason, investors were convinced to
rely on his reputation rather than a scientific study of the investment scheme offered by him
(Ionescu, 2010). Likewise, in the Modaraba scam, the religious clerics were exploited having a
trustworthy profession in Muslim societies (Irfan et al., 2018).
In conclusion, Ponzi culprits, in general, having the quality of entrepreneurs, can inspire trust,
assure the safety of investment by playing with words, convincing and charming in nature, and
make large charitable contributions (Wilkins et al., 2012). Furthermore, to inspire and cajole the
masses, perpetrators live lavish and extravagant life (Lewis, 2012; Benson, 2009).
Methodology
The population of this study was the investors of the Modaraba scam from KP province.
Though, the size of the population was very diverse but the nature of investment was very
much alike, so we preferred to sample the respondents through a snowball sampling
method[9]. This sampling method is preferred for a few reasons. One, Noy (2008) claimed
that snow-ball is the most widely used method in qualitative research. Two, investment in
the Modaraba scam followed the snowball mechanism to enroll new investors. Three, most Investors’
of the investment agreements in the Modaraba scam were not properly documented and it perspective on
was almost impossible for the fieldworker to access the investors based on other sampling
methods.
the Modaraba
In total, 18 sample respondents were approached for the purpose of data collection. This scam
size of the sample[10] was not predefined as we planned to collect data to the point of
saturation to fully grasp the enticements of the investors towards the scam. The point of
saturation is an approach to collect information as long as there is an influx of new
information about relevant variables, while the data collection stops, when the same
information is received repeatedly from respondents (Glaser et al., 1968). During the conduct
of interviews, many ideas were found repetitive, but still each interview added some new
insights. However, beyond the 14th interview, we found that the similarity of ideas is about
to reach to the level of congruence. Resultantly, the research stopped the data collection after
the 18th interview[11].
Semi-structured interviews[12] were used to collect data from the interviewees because
Dawson (2002) claimed that it is the most commonly used technique in qualitative studies.
Further, studies like Wilkins et al. (2012) and Irfan et al. (2018) used this technique for their
research on victims of Ponzi schemes, which is very much in resemblance to this study.
None the less, we were eager to exploit the benefits of this technique highlighted by Cohen
and Crabtree (2006) as:
it allows the research to prepare questions before an interview,
allows the freedom in the expression of opinions and
and yield comparable and reliable data.
Data collection started in November 2014 and completed in March 2015 over a period of five
months in the light of an interview guide[13]. The duration of the smallest interview was
13 min and the duration of the longest one was 44 min. In the start of each interview, the
interviewer disclosed the purpose of the research to each interviewee to encourage him to
participate in a discussion without any reluctance. Then, following the interview guide, the
listed questions were asked sequentially. The interviewer encouraged the respondents,
during the interview, to talk more and more to fully grasp the facts. For that reason, some of
the unstructured questions played a value-added role in the course of interviews. The
interviews were fully audiotaped and before each interview a verbal permission was sought
from each respondent as to record the interview through an audiotape device[14].
For the analysis of results, the study used a thematic analysis technique. Thematic analysis
is a phased analytical process that starts with digging into the data, development of data codes,
searching for relevant themes in data set, review of the relevant themes, proper definition and
naming of appropriate themes (Braun and Clarke, 2006). The research preferred this technique
because Boyatzis (1998) argued that it is an analytical method widely used in qualitative
research. Further, Joffe (2012) claimed that thematic analysis best suits in a situation to
understand how a phenomenon under study is conceptualized by a community.
The research in hand conducted a thematic analysis in a five steps process. Firstly, the
audiotapes were transcribed preferably on the day of each interview. However, some of the
interviews took more time during transcription. The transcription was listening to and
writing, listening to again and rewriting process. Once an interview was fully transcribed, a
second re-look was made to ensure something important was not missing. This relook was
done by listening to the audio-tape and comparing it with the document of transcription.
The errors and omissions, when found were rectified instantly. During transcription, each
JFC investor was awarded a unique identification code as MN-xx[15]. The whole story of a single
interview is saved in a word file in the name of investors’ code[16].
Secondly, to generate a fact sheet, answers of all respondents against each interview
question were classified in a separate document[17]. This enabled the research to know the
stance of all respondents on each question separately. Further, to generate meaningful themes,
the research used an open coding[18] method. Thirdly, the researcher started to dig into the fact
sheet, developed in step two, to identify similarity in answers. Different codes[19] were
developed to identify the presence of variables in the response of each respondent. Further, the
frequency of each code was noted on a sheet to know as to how many respondents were
striking to that code[20]. This activity was performed for each research question sequentially.
Each fact sheet of each interview question was reviewed at least twice, to find relevant themes.
Fourthly, the similarity in answers enabled the research to find out one or more ideas about
each question. Resultantly, a brief paragraph was written as a summary of all respondents’
opinion on a single variable. Afterward, a suitable name was captioned for each theme. Finally,
each theme was explained in support of the arguments of the respondents.
Determinants of the investment decision: patronage factors that stimulated the investors
Respondents uttered 10 different stimuli that motivated them for substantial investment in
the Modaraba scam. These factors have been categorized into three main themes.
(1) The monetary stimulus
Monetary stimulus[24] is the combination of financial factors that simulated investors for
investment in the scam.
Rate of return
In the Modaraba scam, a prominent stimulating factor was the robust rate of return. The
respondents unanimously considered the rate of return while investing in the scheme.
Table 2 revealed a variety of returns that different investors either received or were
promised to receive. Apparently, it ranged from 5,000 to 10,000 on investment of rupees
Inter- Years of Investment Location (village,
Investors’
viewee schooling Age Employment Experience PKR district) perspective on
the Modaraba
MN-01 12 38 Businessman 10 years 500,000 Batkhela, Malakand
MN-02 10 40 Businessman 3 years 1,300,000 Ouch, Dir Lower scam
MN-03 12 42 Labor in No 20,00,000 Dehri Julagram,
Foreign Malakand
MN-04 7 27 Businessman 2 years 400,000 Inayat Kalai, Bajur
MN-05 10 38 Businessman 5 years 2,700,000 Khar, Bajur
MN-06 16 36 Govt. servant No 100,000 Pashat, Bajur
MN-07 14 38 Govt. servant No 900,000 Totakan, Malakand
MN-08 14 37 Businessman No 400,000 Main Bazar, Mardan
MN-09 8 38 Labor in No 800,000 Takht Bhai, Mardan
Foreign
MN-10 14 37 Govt. servant No 300,000 Dalazak, Peshawar
MN-11 10 41 Businessman 6 years 1500,000 Katlang, Mardan
MN-12 12 43 Businessman 9 years 1800,000 Gul Bahar,
Peshawar
MN-13 10 26 Businessman No 600,000 Chakdara, Dir Lower
MN-14 16 39 Govt. servant 2 years 900,000 Khall, Dir Lower
MN-15 12 35 Businessman No 1,500,000 Matta, Swat
MN-16 16 40 Govt. servant No 700,000 Piran, Malakand
MN-17 14 35 Businessman No 1,000,000 Shabqadar, Table 1.
Charsada Profile of the
MN-18 14 38 Govt. servant 3 years 400,000 Odigram, Swat investors
hundred thousand. A respondent MN-16 commented on the attraction of rate of return in the
prevailing situation as:
though the rate of profit was variable, as the agents offered different rates to different investors at
different times. But still, it was a good rate of return, especially in the current market situation
where businesses are at a slump.
Another respondent, MN-08, unveiled his calculus of why he went for investment in the
scam as:
I am a businessman and I am happy with my business. But I conceived two things that convinced
me for putting my money into the scheme. One, the rate of profit was attractive. I invested rupees
JFC ten hundred thousand and received a profit of rupees two hundred and ten thousand after three
months. Two, it was an easy way of earning. You should do nothing to earn a profit, just invest
your money in the scheme and wait for the completion of the period to receive your profit.
To sum up, Modaraba scam offered to the public a 60% to 120% annual return on their
investment. More meaningfully, the scam offered to earn an amount equal to original
investment or double their investment in the scheme in a period ranging from 10 to 20
months[25]. Like all Ponzi schemes, this return is enormously high because the Regular
Income Certificates[26] offered to investors a maximum of 12.36% annual return in the years
of scam. Still, to compare this rate of profit with other Ponzi schemes, it is less than the rate
of return offered by Charles Ponzi[27] and Double Shah[28], very much high as compared to
Madoff scam[29] but close to the New Era Philanthropy[30].
Persistency in periodic profit
Besides an attractive rate of return, another enticing factor of the Modaraba scam was the
perceived persistence of profit. One-third of the investors avowed that this factor had an
influence on their investment decision. The agents’ disbursed the promised profit to
investors well in time to induce more and more investment. A respondent MN-12 asserted
that “I received the profit regularly, but it just discontinued two to three months before the
un-earth of the scam”. Even some of the investors received the promised profit before the
stipulated time to raise public confidence in the scheme. A respondent MN-18 put forward
that:
normal profit distribution period was three months but once we received the profit after a period
of two months too. On early payment of profit, the agent was of the plea that the transaction has
been completed quickly this time.
However, in reality, this disbursement of profit was only prevalent in the early stages of the
scam. Respondent MN-18 continued as; “though the profit was regular but only for a few
months from the launch of the scheme”. To test this claim of the victims, the researcher
compared the dates of investment and receipt of profit. It was found that the respondents
who had invested in early stages[31] had received two installments of profit, those who had
invested in the middle stages[32] had received only one installment, while those who had
invested in the later stages[33] of the scheme had received nothing.
Overall, the rip-off management was intelligent, especially in two ways. One, some of the
investors opted for receipt of profit and a large number of investors opted for accrued profit.
Those who opted for receipt of profit and received it in early stages, felt that the profit is
consistent. While those who opted for accrued profit felt that the profit is persistently
accrued and added to the principal amount. Two, although the profit was supposed to be
calculated on a monthly basis but its payment was due quarterly. This technique gave the
perpetrator the opportunity to collect more money without feeling the density of payable
profit in the short term. A respondent MN-12 argued that:
while entrusting money to the agent, it was agreed upon that profit is to be calculated each month
with the condition that payment will be made after three months each.
On this parameter, we have to conclude that apparently, the profit of the Modaraba scam
was persistent, but this persistency had two hides. One, persistence was not durable but
momentary. It was worked out to be practiced in the early stage of the scheme to channel
more funds to the scam. Two, the persistence of profit was not a reality but a paradox. The
perpetrator was intelligent maneuverer of the return, which the investors considered as
persistence of profit.
Easy withdrawal of principal amount [and ease in re-investment of periodic profit] Investors’
Identical to the persistency of profit, one-third of the investors admitted that ease in the
perspective on
withdrawal of principal amount and the reinvested periodic profit also motivated them for the Modaraba
investment in the Modaraba scam. The agents were to return the money with no trouble if scam
someone was not willing to continue in the scheme. A respondent MN-02 narrated that; “the
agent told me if you want to get back your money, just inform me a month in advance”.
Notwithstanding, the results showed that 10% of the investors managed to withdraw their
principal amount. On the contrary, MN-05 proclaimed a different angle of the withdrawal of
money as:
it was in the month of April this year, we came to know that the scheme is a fraud. I and my
nephew, who also invested in the scheme, went to the agent time and again since December last
year to withdraw the investment but in vain. During this period, whenever we asked about our
money, the agent promised the payment next week and then he ran away.
The claim of respondent MN-05 prompted the researcher to test the analogue of withdrawal
of the principal amount and persistence of profit. It was noted, when the researcher
stumbled on the dates of withdrawals, that all the investors who have withdrawn their
principal amount were those who have invested in the early stages of the scheme.
Ease in the reinvestment of periodic profit also lured the investors. Those, who were not
in intense need of money or they were eager to have more profit, were encouraged by the
agents to reinvest the profit in the scheme. They were incentivized that the profit of next
term was supposed to be calculated on the accumulated principal investment. Consequently,
many of the investors either partially or fully reinvested the period profit with the
expectation of more profit in the future. A respondent MN-04 admitted as:
I had two separate investments in this scheme. I did receive the periodic profit on one investment
and reinvested the profit of the other investment to grow. Unfortunately, l lost the principal
amount of both investments.
Similarly, a respondent MN-14 reported that: “once I opted for withdrawal of a fraction of
monthly profit. Then, I re-invested the profit for all remaining periods with the aspiration of
more profit”. This re-investment of profit, on the one hand, escalated the total investment
and on the other hand it helped the scam to sustain for a longer duration than its capacity.
Easy way of earning
The last monetary stimulus of investment in the Modaraba scam was the ease in earnings,
which influenced the investment decision of about 28% of respondents. The investors were
just to put their money in the scheme and receive the yield at a stipulated rate and time. The
money generated money as long as it remained in the scheme with no other frets for
investors. A respondent MN-08 expressed his stance on this parameter as:
if you are to run a business of your own, despite many other complexities a large amount of
investment will tie in the receivables. That is why I and many other investors thought that this is
a soft way of earning with zero complications.
The findings of monetary stimulus are in conformity with prior literature on Ponzi schemes.
One, it affirmed Burke (2009), Deason (2012), Mancl (2012), Tsai (2009) and Wilkins et al.
(2012) that Ponzi schemes pay hefty persistent returns in the initial stages of the scheme.
Two, it affirmed Burke (2009) that investors in Ponzi schemes prefer to re-invest the periodic
profit instead of receiving it. Three, it also affirmed Lewis (2012) that requests for
JFC withdrawal of profit and principal amount are honoured in the early stages of Ponzi schemes
(Table 3).
(02) The religiosity stimulus.
The religiosity stimulus[34] was the cornerstone of the scam and accordingly, this research
termed it as the slogan of the Modaraba scam. It glorified the Modaraba scheme as a
matchless investment opportunity, especially, for investors who were averse to invest in
interest-bearing securities.
Dog goodwill[35]: Personality of the agent
A prime component of this scam was the intermediary role of the religious clerics[36]. All the
respondents unanimously acknowledged that personalities of agents, being religious clerics,
really stimulated the public for investment in the Modaraba scam. The professions of
religious clerics are among the trustworthy professions in the Muslim societies and the
followers associate a zero probability of wrongdoings with them. This blind trust in the
agents led the investors to contribute to the scheme substantially without any hesitation. A
respondents MN-17 emphasized that:
one thing that highly convinced me [for investment] was the association of agents to Deni
Madaris [institution of Islamic religion]. Further, I believed them because they were dressed in
clean white clothes, had long beards and rosary.[37]
Respondent MN-17 divulged his decision-making and a key driver of the decision as:
I carefully thought before investment whether to invest or not. Then, I concluded that agents of
the scheme are people of good repute. They are religious scholars, a respectable class of our
community. I never believed that this syndicate can deceive the masses on any matter including
financial matters. All this encouraged me to invest in the scheme.
Conclusion
Ponzi schemes are fraudulent investment scams that often emerge with a novel operational
design, but the basic principle “to-rob-Peter-to-pay-Paul” remains unchanged. In Pakistan,
the Modaraba scam operated as a Ponzi scheme and it swindled a substantial amount of
hard-earned money of thousands of investors. Earlier research divulged mainly the
operating mechanism of the Modaraba scam, while this study focussed to identify the key
patronage factors of the scam that motivated the general public for investment. Further, this
research developed a model (Figure 1), as a novel contribution, which reflects the weight of
each stimulating factor in the overall investment decision. Data has been collected from
investors of the scam through semi structured-interviews, while results have been compiled
through thematic analysis.
It was found that the investment decision in the Modaraba scam was based on 10
different factors categorized by this research into three themes as the monetary stimulus, the
religiosity stimulus and the lubricants. The analysis also revealed that the major stimuli
were the rate of return and agents’ personality that unanimously influenced the investors’
investment decision. Stimuli like investors’ perception that business is Sharīʿah-compliant,
Figure 1.
Factors’ degree of
influence on
investment
decision[43]
JFC their greed and affinity factor influenced half of the investors’ investment decisions. While
factors, like songbird investors, ease in investment and withdrawal, easy way of earning
and the contentment of agents influenced the decision of about one-third of the investors.
However, as the scam was dressed in the clothes of religiosity, the religiosity stimulus,
which became the slogan of the scam, accompanied by an attractive rate of return enticed
the investors at large.
Notes
1. An Italian who immigrated to Boston USA in 1903.
2. But realistically history shows some earlier scams as John Law in France in 1719, South Sea
Bubble in Great Britain in 1720, William “520%” in 1899 and Miller’s weekly 10% return. Burke
(2009). Ponzi schemes: common tactics, red flags and selection cases. 53 Union Internationale des
Advocates Congress in Seville Spain, Dealbook (2008]). A century of Ponzi schemes [online]. The
New York Times. Available: http://dealbook.nytimes.com/2008/12/15/a-century-of-ponzi-
schemes/?_php=true&_type=blogs&_r=0 [Accessed 25 April 2014], Furman and Dejoy (2009).
Before and after Bernie: Ponzi regulation or lack thereof? International review of business
research papers, 5, 63-71.
3. Clikeman (2009), why it’s called a Ponzi scheme. New Accountant Magazine claimed that actual
coupons in circulation were only 27,000 in number.
4. Wipada et al., (2009), IMF survey: IMF advice helps fight financial fraud as schemes multiply.
Available: https://www.imf.org/en/News/Articles/2015/09/28/04/53/sopol021209a [Accessed
15 June 2015], reported Ponzi schemes in countries such as USA, Jamaica, Lesotho,
Swaziland, Kenya, Namibia, Nigeria and Seychelles (Bhattacharya, 1998). On the Possibility
of Ponzi schemes in Transition Economies mimeo listed in his study countries such as
Russia, Romania, Bulgaria, Slovakia, Serbia, the Czech Republic and Albania that had Ponzi
schemes. Furthermore, countries such as India, Portugal, South Africa, Jordan, Haiti, Costa
Rica, Malaysia and Philippines had Ponzi schemes (Furman and Dejoy, 2009). Before and
after Bernie: Ponzi regulation or lack thereof? International review of business research
papers, 5, 63-71.
5. His actual name was Sibtul Hasan Shah. As he offered the public doubling the money in 45 to 90
days, so generally, he is known as double shah.
6. Modaraba is the contract of a partnership under the modes of Islamic finance where the owner of
fund/Rabul – Mal invests money and the manager/Modarib invests knowledge, skills and
abilities to run a legal and permissible/halal business (Usmani, 2002). An introduction to Islamic
finance. Brill, Hassan and Lewis (2007). Handbook of Islamic banking. Edward Elgar Publishing.
Profit from operations is distributed at an agreed ratio. However, the loss, if any, is borne by the
Rabul-Mal only Usmani (2002). An introduction to Islamic finance. Brill.
7. Khyber Pakhtunkhwa is a province of Pakistan situated in north west of the country.
8. It is considered as the largest Ponzi scheme in the history, which amounts to $65bn (Jacobs
and Schain, 2011). The never ending attraction of the Ponzi scheme, Walsh and Spalding
(2011). Recognizing and responding to red flags: The Stanford Ponzi scheme. Journal of Legal
Issues and Cases in Business 1, 1-13, Yang (2010). Investment Planning Strategies for
Madoff’s Ponzi scheme. Proceedings of the Northeast Business and Economics Association,
Hurt (2010). Evil has a new name (and a new narrative): Bernard Madoff, Drew and Drew
(2010). Identification of Ponzi schemes: Can a Picture Tell a Thousand Frauds, The. Griffith L.
Rev., 19, 51. Because of its volume, Sarna (2010). History of Greed: Financial Fraud from Tulip
Mania to Bernie Madoff, John Wiley and Sons named Madoff’s scheme as mother of all Ponzi
schemes.
9. A sampling method in which the contact information of one informant is provided by the other Investors’
informant and so on Noy (2008). Sampling knowledge: The hermeneutics of snowball sampling in perspective on
qualitative research. International Journal of social research methodology, 11, 327-344. the Modaraba
10. Though, Kumar (2005). Research methodology-a step by step guide for beginners argue that size of scam
the sample is not a significant issue in qualitative research.
11. Overall, the point of saturation technique was used according to guiding principles of Francis
et al., (2010). What is an adequate sample size? Operationalising data saturation for theory-based
interview studies. Psychology and Health, 25, 1229-1245.
12. It is a tool in which the researcher asks the respondents a list of pre-determined questions, as well
as at the same time let allow the respondent, if necessary, to explore some non-listed questions
(Saunders et al., 2011). Research methods for business students, Pearson Education India,
Brinkmann (2014). Interview. Encyclopedia of Critical Psychology. Springer.
13. Interview guide was developed by the researchers in the light of a thorough literature review. It
was revised twice before actual data collection. Once in the light of an expert opinion of a
qualitative research, and then after a pilot study.
14. The author used to audio tapes with a smart phone Samsung Galaxy Note III.
15. The alphabet MN was used for Modaraba Investor and xx was used for number of respondents
(01 to 18) as per order in which the interviews were conducted.
16. As a result of this activity, a folder was generated containing 18 files namely (MN-01 to MN-18).
The total volume of these files was 848 kb on disk.
17. At the starts of each document an interview question was written and then all 18 replies of
respondents against that question were reproduced from investors’ code files.
18. It is a coding technique that is used to analyse the written text to discover concepts, ideas and
theories (Corbin and Strauss, 2008). Basics of qualitative research: techniques and procedures for
developing grounded theory. Thousand Oaks, CA: sage.
19. Detail of codes and its description is available in Table 2.
20. The repetition of a code by respondent during interview has been ignored.
21. Pakistani rupees (Note: investment and profit both were in Pakistani currencies).
22. The research preferred to use the term moderately educated instead of educated because 56% of
the respondents had up to 12 years of schooling only.
23. Total experience of total respondents divided by total number of respondents (40/18 = 2.22 years).
24. Classification of financial factors under the theme of monetary stimulus is the contribution of this
research.
25. 100/rate of profit * 12 i.e. 100/120 * 12 = 10 months and 100/60 * 12 = 20 months.
26. Regular Income Certificates (RICs) are saving certificates issued by national savings to fulfill the
monthly requirements of the general public (GOP, 2017). Regular Income Certificates [online].
National savings. available: http://savings.gov.pk/project/regular-income-certificates/ [accessed
25 February 2017].
27. To receive 50% return in 45 days or double the money in 90 days.
28. In the early days of scheme, double shah offered to double the money in 15 days. However, in
later stages of the scheme, he offered to double the money in 70 days.
29. In Madoff’s scam the rate of return ranged from 10% to 13% annually Buckoff and Kramer
(2011). Conducting effective Ponzi scheme investigations Journal of Forensic and Investigative
JFC Accounting 3, 1-24, Lewis (2012). New dogs, old tricks. Why do Ponzi schemes succeed?
Accounting Forum, 36, 294-309.
30. Brennet offered doubling of money in six months (Pressman, 1998). On financial frauds and their
causes: Investor overconfidence. American Journal of economics and sociology, 57, 405-421.
31. In the first quarter of the year 2012 or before.
32. Second and third quarter of the year 2012.
33. Last quarter of the year 2012 or thereafter.
34. It is another theme and a novel contribution of this research to the existing literature.
35. It is the value of a business that arises because of people who manages it. On this analogy, this
research developed the theme of dog goodwill for the personality of intermediaries that convinced
the investors towards the scam.
36. (Irfan et al., 2018), understanding the operating Mechanism of Modarab scam: Victims’
perspective on a Ponzi scheme. Business review, 13, 81-93. Concluded that the con artist of
Modaraba scam assigned the role of raising public money for investment in the scam to the local
preachers, Islamic scholars and prayer leaders.
37. This is a common dress code of the Islamic scholars in Pakistan.
38. Rabbit goodwill arises when the products or services are in an acceptable radius for consumers.
On this analogy, this research developed the theme that majority of the people are religious
minded and they prefer only Sharīʿah-compliant product rather than interest based products.
39. An Islamic scholar having the authority to issue rulings on various matters in the light of Islamic
principles.
40. When the researcher asked about the name of the religious institution, the respondent was not
quite sure but he reckoned that the verdict was most probably issued by Jamia Banuria Karachi.
41. A theme developed with the analogy as lubricant excels the operation, similarly these factors
escalated the investment decision in the scam.
42. Memorizing of the Holy Quran.
P
43. This research developed the model ð fxW Þ with the analogy that the value of all factors that led
to investment decision has been considered as equal to one (or hundred). In the model, fx is the
function of individual factor while W is the weight of single factor. (Weight is derived as dividing the
number of respondents striking a factor by total strikes of the total respondents e.g. rate of return is
stroked by 18 respondents and the total strokes of all respondent are 90 so, 18/90 = 0.2 or 20%.
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Corresponding author
Irfan Ullah can be contacted at: papeenkhel@gmail.com
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