Determinants of investment decision in a Ponzi scheme: Investors’ perspective on the Modaraba scam

Published date15 May 2020
Date15 May 2020
Subject MatterAccounting & Finance,Financial risk/company failure,Financial crime
AuthorIrfan Ullah,Wiqar Ahmad,Arshad Ali
Determinants of investment
decision in a Ponzi scheme:
Investorsperspective 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
Purpose This paper aims to identifythe key patronage factors that encouraged the public for investment
in the Modaraba scam a Ponzi schemeperpetrated in Pakistan with a whim of Sharīʿah-compliantbusiness
and intermediationof religious clerics.
Design/methodology/approach In a qualitative research,semi-structured interviews were conducted
with the investorsof 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 stimulusand lubricants, which mobilized investmenttowards the scam. In general, a lucrative rate
of return on investmentand personality of the agents, being religious clerics, were the two prominentreasons,
which convinced unanimously all investors. In particular, the religiosity stimulus (agentspersonality and
Sharīʿah-compliantbusiness) was a novel and eye-catching slogan of the scheme.
Originality/value Keeping in view the amountof scam and number of victims, this research is a robust
attemptto concludeon the determinants of investment decision in the Modarabascam.
Keywords Ponzi scheme, Investment decision, Modaraba Scam
Paper type Research paper
A rational investmentdecision is an important function of individualinvestors 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 commonone among them
is the Ponzi Scheme (Wipadaet al.,2009).
In Ponzi schemes, con artists collect public money as an investment inthe schemes with
the promise that the investors would accrue a hefty rate of return with zero risks (Pozza
et al., 2009;Grifn, 2011;Searcey,2014;SECP, 2004;Nolasco et al.,2013). In accordancewith
the pledge, prot is distributed among investors periodically at the promised rate and time
(Burke, 2009), but the distribution of prot does not last longer, it continues merely in the
Journalof Financial Crime
Vol.29 No. 4, 2022
pp. 1172-1190
© Emerald Publishing Limited
DOI 10.1108/JFC-02-2020-0027
The current issue and full text archive of this journal is available on Emerald Insight at:
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 uniquebusiness 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 prot, 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 prexPonzifrom 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 throughthe purchase and sale
in different countries at varied price and used the benets 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 collected20m 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 Charlesbusiness, he had only 30
dollars[3] worth of coupons at thetime 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 prot of this scheme,
Burke (2009) claimed that banks were offering only a 5% return on savings accountswhen
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 Charless 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 anothermega
nancial scandal namelythe Modaraba scam.
Modaraba scam was a nancial 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 scamin a list of 50 cases of nancial scams
(NAB, 2015). The scam swindled up to PKRs. 500bnfrom 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 strategyof 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 prot 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 paymentof prot 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 nd out the key patronage factors that induced
perspective on
the Modaraba

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