Guided Tour
 View Your Account
 Shop for Stocks
 Research Stocks
 Educate Yourself
 Family Investing
 Retirement Focus
 Our Strategy
 About Us
 Helpdesk
 Home
Google Custom Search
 



Archives

The Albanian Ponzi Scheme
Brian Trumbore
President/Editor, StocksandNews.com

Recently I was in Albania and an issue I brought up with a few folks I came across was the pyramid scheme of 1996-97 that roiled the nation. Alas, no one really wanted to discuss it. As you’ll see, it’s probably because it was a tremendous national embarrassment.

Back in March 2000, Christopher Jarvis produced a study of the crisis for the International Monetary Fund’s magazine, “Finance & Development.”

The scope of Albania’s pyramid scheme was unprecedented; at its height, the nominal liability “amounted to almost half of the country’s GDP. Many Albanians – about two-thirds of the population – invested in them. When the schemes collapsed, there was uncontained rioting, the government fell, and the country descended into anarchy and a near civil war in which some 2,000 people were killed.”

A big cause of the peoples’ naivety when it came to the schemes was the fact Albania had been under a communist dictatorship for 40 years; the 40-year rule of Enver Hoxha, who had cut off virtually all forms of private enterprise and property, as well as cutting the country off from outside influences and information. When the transition to a more market-based system finally began around 1991, the people were ill-prepared. There had been no experience in their past with market institutions and practices.

Christopher Jarvis:

“Although Albania’s transition to a market economy was rapid and quite successful, financial sector reform was very limited. Albania’s formal financial system was rudimentary. There were few private banks. The three state banks, which held 90% of deposits [Ed. this is similar to Iceland’s situation before their recent collapse], offered positive real interest rates but had growing portfolios of bad loans, prompting the Bank of Albania to impose tight credit ceilings on them. With the banks unable to satisfy private sector demand for credit, an informal credit market based on family ties and financed by remittances grew. The informal lending companies were initially regarded as benign and even as making an important economic contribution. Operating alongside them, however, were deposit-taking companies that invested on their own account instead of making loans. These companies were the ones that turned into pyramid schemes.”

What quickly became clear was that no one had responsibility for the markets. The Bank of Albania had been given the power to close illegal deposit-taking institutions with a February 1996 banking act, but it couldn’t get the government’s support, because the government was supportive of the new financial companies springing up. 

“(In) November 1996, even as the pyramid schemes began to crumble, the prime minister and the speaker of the parliament accepted medals in honor of the anniversary of one of the companies….There were allegations that many government officials benefited personally from the companies.”

While the following definition of a pyramid scheme is undoubtedly known by you, I’ll let Christopher Jarvis explain the process anyway.

“In a typical pyramid scheme, a fund company attracts investors by offering them very high returns; these returns are paid to the first investors out of the funds received from those who invest later. The scheme is insolvent – liabilities exceed assets – from the day it opens for business.”

But word spreads about the high returns and more investors are drawn in, helped in no small part sometimes by the ostentatious spending by the operators themselves. ‘I want to be like that,’ people think. Eventually, though, to attract new investors as the interest and principal due to early investors exceeds that coming in from new, “a scheme may raise interest rates, but the larger interest payments soon force it to raise rates again. Eventually, the high rates begin to arouse suspicion or the scheme finds itself unable to make interest payments. When investors try to get their money out, they discover the truth about the scheme, whose demise is swift – and usually accompanied by acts of outright theft by the operators, if they are not caught first.”

Some of the Albanian companies met the pure definition of a pyramid scheme. Others, though, had actual real investments, but were believed to be involved in criminal activity, Albania having quite a reputation in this regard.

Two events set the whole pyramid-scheme mania in motion in late 1996.

“First, at the end of 1995, United Nations sanctions against the Federal Republic of Yugoslavia were suspended, eliminating an important source of income (smuggling) for the companies. In January 1996, the leading companies increased their interest rates from 4-5 percent a month to 6 percent a month, or almost 100 percent annually in real terms. (Annual inflation in Albania was 5 percent in 1995 and 17 percent in 1996). Second, the uncertainty created by approaching parliamentary elections, which were to be held in May, prompted the companies to raise their rates again, this time to 8 percent a month, or a real annual rate of well over 100 percent. During the same period, new schemes entered the market, offering even higher rates. In early 1996, two new pyramid schemes – Shafferi and Populli – were created, and an already existing scheme that had no real investments – Sude – stepped up its activities, offering interest rates of 12-19 percent a month.”

Xhafferi and Populli between them attracted 2 million depositors – in a country with a population of 3.5 million!!! All within a few months. The investment funds “felt pressured to compete and began to offer higher interest rates on deposits. In July, Kamberi raised its monthly interest rate to 10 percent. In September, Populli began offering more than 30 percent a month. In November, Xhafferi offered to treble depositors’ money in three months; Sude responded with an offer to double principal in two months. By November, the face value of the schemes’ liabilities totaled $1.2 billion. Albanians sold their houses to invest in the schemes; farmers sold their livestock. The mood is vividly captured by a resident who said that, in the fall of 1996, Tirana [Ed. the capital where I spent my week] smelled and sounded like a slaughterhouse, as farmers drove their animals to market to invest the proceeds in the pyramid schemes.”

Throughout this time, the government sat back and did nothing, despite repeated warnings from the IMF and the World Bank. It took until October before the government began warning the public. Then, when it did offer cautionary notes, it tried to draw a distinction between “real” companies and the pyramid schemes, though by now there was very little difference between the two. Then-President Sali Berisha (currently prime minister) came to the defense of investment companies even when there were reports they were involved in money laundering.

Then in November, the government set up a commission to investigate the schemes but it never met. On November 19, Sude defaulted and the collapse was under way.

“Sude’s collapse shook the public confidence in all of the companies and new deposits dried up. (An attempt by four of them) to convince depositors of their soundness by lowering monthly interest rates to 5 percent failed. In January 1997, Sude and Gjallica declared bankruptcy, triggering riots. The other schemes soon also ceased to make payments. The government belatedly took some useful steps. First, it refused to compensate depositors for their losses, which made achieving economic stabilization after the crisis much easier than it would otherwise have been. Second, it began to move against some of the companies. In January 1997, it froze the bank accounts of Xhafferi and Populli, which amounted to $250 million (10 percent of GDP). The Bank of Albania, on its own initiative, began to limit daily withdrawals from bank accounts to prevent other schemes from emptying their accounts. In February, parliament passed a law banning pyramid schemes (but not defining them). However, the government continued to differentiate between companies with real investments and pure pyramid schemes and did not move against the largest companies.

“By March 1997, Albania was in chaos. The government had lost control of the south. Many in the army and police force had deserted, and 1 million weapons had been looted from the armories. Evacuation of foreign nationals and mass emigration of Albanians began. The government was forced to resign. President Berisha agreed to hold new parliamentary elections before the end of June, and an interim coalition government was appointed.

“The interim government inherited a desperate situation. Some 2,000 people had been killed in the violence that followed the pyramid schemes’ collapse. Large parts of the country were no longer within the government’s control. Government revenues collapsed as customs post and tax offices were burned….prices increased by 28 percent in the first half of 1997. Many industries temporarily ceased production, and trade was interrupted.”

But with all these obstacles, the interim government began to make progress, though they met stiff resistance in trying to roll up the pyramid schemes, including from parliamentarians that had themselves invested in the companies. Finally, in July, foreign administrators from international accounting firms were appointed by the newly elected parliament, with the help of the IMF and World Bank.

It took several more months to clear up the situation. The schemes’ owners were none too pleased and threaten violence. Finally, the owners were dislodged, though the administrators did not get full control of all the companies until March 1998. Most of the assets were gone.

In the end, the overall economy collapsed about 7 percent in 1997, with most of the decline due to interruptions in production as a result of the civil disorder. Inflation rose to 40 percent as the currency dropped and deficits soared as a result of revenues drying up.

But the long-term effects proved to be negligible, “reflecting not only the resilience of the Albanian economy but also – and, perhaps, most important – the government’s adjustment efforts and its refusal to bail out depositors.”

Isn’t that last bit interesting? The Albanian government also tackled the deficit and undertook long-overdue structural reforms.

“However,” as Christopher Jarvis adds, “the social effects were profound. In addition to the loss of life, thousands of people were impoverished either by their unwise investments in the pyramid schemes or by the destruction of their property in the ensuing violence.”

Interestingly, as noted above, Sali Berisha is back in charge, this time as prime minister, the real position of power today. Berisha’s Democratic Party won an incredibly tight election last June and the opposition Socialists have refused to participate in parliament. Just this past weekend, an estimated 200,000 protested in Tirana, demanding a recount. It’s almost been a full year of this.

In my trip to Tirana, I saw firsthand what one of the flashpoints is. A square in the middle of the capital named after their national hero, Skanderbeg. The issue is who gets the contracts to renovate it and whose development plan prevails…the Democrats’ or the Socialists’.    Truthfully, I’m kind of glad I got out of there when I did.

Wall Street History will return in two weeks.


Brian Trumbore

Go to


The BUYandHOLD website contains links to third-party websites on the Internet. BUYandHOLD provides these links to these websites only as a convenience to users of the website. Links on the BUYandHOLD website are not endorsements by BUYandHOLD or Freedom Investments, implied or express, of the linked sites or any products, services or links in such sites; and no information in such sites has been endorsed or approved by BUYandHOLD. Linked sites are not under the control of BUYandHOLD or Freedom Investments, and we are not responsible for the contents of any linked site or any link contained in a linked site. No information contained in the BUYandHOLD website or accessed through any linked site, or any link contained in a linked site, constitutes a recommendation by BUYandHOLD or Freedom Investments to buy, sell or hold any security, financial product or instrument. Information accessed through linked sites is not, nor should be construed as, an offer or a solicitation of an offer, to buy or sell securities by BUYandHOLD or Freedom Investments. BUYandHOLD does not offer or provide any investment advice or opinion regarding the nature, potential, value, suitability or profitability of any particular security, portfolio of securities, transaction or investment strategy, and any investment decisions you make will be based solely on your evaluation of your financial circumstances, investment objectives, risk tolerance, and liquidity needs.

Copyright © 1999 – 2014 Freedom Investments. All Rights Reserved.
Freedom Investments, Inc. Member FINRA/SIPC
Privacy & Security