Financial Fraud and the Bottom of Pyramid

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THE present scenario of the financial fraud in the state reminds the incident occurred in Colombia in 2008. As many as 4 million Colombian invested in the dubious pyramid schemes. When the schemes collapsed, the country witnessed an unprecedented turmoil. The investors of those schemes demonstrated a violent protest in 13 cities of the country. The Colombian government was forced to declare a state of emergency to restore law and order in the country.

Though lately, our government has initiated a CBI probe into Ponzi scams of the state. It is alleged that minister, politician, journalist, media houses and even so called artist were involved in the scams. More shocking part of the story is that head of the state police administration was allegedly protecting the Ponzi boss and his illegal activities. Under such a situation how the common man can expect that law enforcing agencies will be protecting their interest? At the same time knowledge and competence of law enforcing agencies are to be relooked. It was reported that police raided the office of Bandhan Microfinance and arrested its employees. If the investing officials even can’t differentiate between a Ponzi company and microfinance company, how they will control the financial fraud in the state. Lack of financial knowledge among the masses as well as law enforcing agencies is a matter of great concern.

When financial services are treated as a fundamental need of human being, a large number of populations are excluded from the ambit of organized financial sector. More than 50% of Indians are yet to be included in the formal financial system. The scenario in Northeast is more grimmer and alarming than the other parts of the country. Out of 90 unbanked development blocks of the country, 80 are in Northeastern states. The marginalized section of the society or the so called bottom of the pyramid never gets access to financial services from the bank. This group is always vulnerable to financial fraud by Ponzi, Pyramid and Chit fund companies. Because those fake financial companies are the last resort for these poor people to meet their financial services needs.

It is proven that financial inclusion and financial literacy is the most efficient tool to protect the bottom of the pyramid from financial frauds. As like as financial inclusion, the level of financial literacy in the country is also worst in world ranking. Only 35% of Indians are financially literate and ignorance in more among the women. Along with many countries India has also adopted financial literacy plan, but notable result is still awaited.

Say, for a while we believe that after CBI investigation some culprits will be brought to justice but does it mean that the investors to get back their hard earn money? Who can assure that such dubious companies will not emerge after a few years in different shape or even capable of causing more damage to the state economy? Perhaps nobody can assure! It is reported that state government is thinking to create a commission to look after the activities of fake financial entities. Question arises, why government is not interested to find out the root cause and administers appropriate remedies. Think for a while, if the victims of the Ponzi, Pyramid or Chit Fund companies would have a bank accounts and were aware about the financial eco-system or even the average ROI in savings would they have been interested to invest/deposit in fake financial companies? No doubt the answer will definitely be a big NO. Then why the government is interested to tackle the issue with temporary and ineffective measures? Is someone from political class yet left to be benefited?

These scams have not only victimized the large numbers of depositors but a good number of agents and field workers who  have lost their job and means of livelihood. This will have a severe impact on the economy of the state. Government should think about their issues as well. As we have discussed that banking penetration in the state is poor and due to poor road connectivity and geographical disadvantages banks are not interested to open new brick and mortar branches in the rural areas. Keeping in mind the jobless agents and field workers government may push the branchless banking by appointing them as banking correspondent of banks at their respective areas. This will not only increase the banking penetration in the state, also can rehabilitate the agents and field workers as far as their livelihood is concerned.

At the same time government should approach other channels to promote financial inclusion and financial literacy. We have the largest network of post offices in the world. These post offices are going to be equipped with Core Banking System (CBS) very soon. If government wishes, these post offices have the potentiality to be the ‘change agent’ as far as financial inclusion is concerned. In the same way there are numbers of professionally managed microfinance companies working in the urban as well as rural areas of the state. These MFIs are doing a tremendous job in terms of woman empowerment and livelihood generation. These MFIs can be approached to promote financial literacy. Two major players RGVN and Ujjivan have already started financial literacy from their own. Government can incentivize their projects to attract more players to incorporate financial literacy programme in their microfinance programmes. That will benefit the MFIs as well. Financial literacy amongst the client will help the MFIs to manage NPA, ghost loan, loan sharing and multiple borrowing. Alternatively government can introduce financial literacy in the school curriculum too.

The only necessary thing is good intention of the government to root-out the financial fraud to protect the bottom of the pyramid.

3 thoughts on “Financial Fraud and the Bottom of Pyramid

    Hayat Khan said:
    May 1, 2013 at 3:30 am

    Heard about these words – Ponzi, chit fund but don’t have any clear concept. Can you explain plz? Anyway i always thoroghly read your articles, find each one good. This one also pulled attraction

    Abdul Kalam Azad responded:
    May 2, 2013 at 3:40 pm

    Dear brother Hayat Khan,

    I am happy to know that you read my articles regularly. The term Ponzi is the last name of Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi of Italy. He became infamous for running dubious scheme to cheat the investor. Later he was jailed also. Ponzi schemes/companies promise to pay a high return on investment. And they also fulfills their promise during growing phase of their business. Sometimes they show profitable business entities also. We can take the example of Seven Sister Post. People who invested in Saradha were might be thinking that Saradha can give them high return as they have SSP like business entity. But the facts is that the initial return is paid from the invested amount of other investors and the promoter of those schemes/companies knows abinitio that the scheme/company is going be closed down one day. On the other hand Pyramid scheme is a bit different. In pyramid scheme the investor has to recruit other investors too to earn the return. But the funda is same. You can take the example of Shamwab, UNIPAY2YOU, ROYAL FOREX etc.

    It is shameful to observe that the newspapers and TV channels are terming these companies as CHIT FUND company. As per our existing law chit fund companies are not illegal. The office bearer of Chit fund companies recently told in press conference that not single companies indulged in this scam was registered under Chit Fund Act 1982. To have clear idea about the chit fund company we can refer the thrift and credit societies of various employees union.

    I firmly believe that the major reason behind this menace is nothing other than the lack of financial literacy and financial inclusion. Let me share an interesting story. When first people were complaining about Jiban Suraksha I had a email conversation with one of the well known editor of an Assamese TV channel. After the exchange of few email, he sent me a mail saying the “My funda is to create a fear among the people, so that they remain away from these companies”. Think for a moment if we choose to cheating to protect people to cheating what will be our future?

    Regards,
    Abdul

    kalam said:
    July 30, 2013 at 10:25 am

    I need a book on it. Can you please lend me a book?

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