Albania's Pyramid Schemes Case Study Example | Topics and Well Written Essays - 2250 words

Albanias profit Schemes - Case Study ExampleThe private sector contributed about two third of the GDP, and the rising remittances from the Albanians working Greece and Italy increase the disposable incomes. The improved economic environment increased consumer imports, and investments in the emerging gain schemes. lack of proper financial institution and securities markets encouraged the Albanians to look for alternative investment opportunities such as the profit schemes. This paper examines the effects of the benefit scheme on the local economy. 2. Background As suggested by Dirk pyramid schemes operate on a simple principle whereby, coin paid by the later investors is apply pay artificially postgraduate returns to earlier investors (78). At first, early investors are promised high returns to woo latent investors. As the word spreads, many people are pulled into the scheme to benefit from the huge capital gains. As Jarvis observes during the early phases, the whole process seems to work, but with judgment of conviction the interest and principal owed to the old investors exceed the money that the scheme has (5). As a result, investors are forced to cut short the payments and investors start panicking. Some of the players that were mired in the pyramid scheme include VEFA which was organise in 1992 by Vehbi Alimuca, and took in at least $700 jillion in deposits. The institution started as a trading company and is accused of promising customers unendurable order. The second major player is Xhafferi which was formed by Rrapush Xhafferi and at the time of its break-dance it had taken $250 in deposits. Another key player in the pyramid scheme was Gjallica which was formed in 1991 and took in an estimated $850 million in deposits. Sude on the other hand, offered lottery services but thereafter started taking deposits from the customers. At the time of its collapse, the company had $90 million in liabilities and no assets. Just like Sude, Populli off ered to pay its customers two clock principal invested after 3 months. The company worked closely with the Albanian opposition parties, and at the time of its collapse its liabilities were over $150 million. 3. Events leading to the crisis As Chris Jarvis, an IMF economist observes in the article titled, the rise and the fall of pyramid schemes Albania, the origin of the pyramid schemes can be traced to the decline of the smuggling market. According to Jarvis the smuggling of oil products through and through Albania ended with the suspension of the UN sanctions against Yugoslavia (10). As a result, the pyramid period schemes were forced to look for alternatives sources of income. One of the viable ways at the time was to increase the interests so as to attract capital from potential investors. within a short time the deposit-taking market grew tremendously, and by the mid-1996, the deposit-taking companies were offering interest rates as high as 19%. In the first few months, the companies had attracted two million depositors, and the number continued to change state in the second half of 1996. The players in the informal sector competed by offering attractive rates and just to illustrate, in the September 1996 Populli offered a monthly interest are of 30% which Xhafferi countered with a 44% rate while Sude offered to double the principal in two months. To capitalize on these opportunities some of the investors interchange their property while other sold their animals, and then put the proceeds in the pyramid schemes. distressed about the integrity of the schemes, the Governor of Bank of Albania issued the first warning, and then followed by the Minister of Finance. The government formed a committee to investigate the schemes but