Albania’s Experience with Pyramid Type Schemes

Due to the weaknesses in the formal financial sector in Albania in the immediate post transition period, an informal financial market flourished and was at the time tolerated by the authorities. These informal companies were considered to be making a valuable contribution to growth. Among them were some who accepted deposits and offered loans and others who borrowed money at very high interest rates for investment on their own account. The precise nature of business of these latter companies were unknown.
It was these that either were or later transformed into operators of Pyramid type financial schemes. Their claim was that there were very profitable opportunities for investment in small businesses and on that basis they promised unrealistically high interest and return on the principal invested. In reality investments if any made by these companies were purely for “window dressing.” In early 1996 more
companies became involved in these types of schemes and in order to attract funds, interest rates were hiked competitively drawing in more depositors. People even sold property and farmers sold livestock
to invest in these schemes while employers found it difficult to attract workers as they preferred to live off their earnings of interest. At the peak of operations the nominal value of the liabilities of the
Pyramid type schemes amounted to almost half of the country’s 1996 GDP. Inevitably, due to the unsustainability of the schemes, the companies were forced to default somewhere in 1996. When payments which were regularly received by depositors stopped, there was a violent outburst of public protest. Within a short period of about 4 months all companies operating Pyramid type schemes collapsed.
This caused the overthrow of the government in power and plunged Albania into anarchy, bringing with it tremendous social and economic costs. The widespread civil disorder that ensued caused an
estimated contraction of output of about 7 per cent in 1997. Over 2000 lives were lost and thousands fell into poverty due to either their unwise investments in the companies that defaulted or the destruction
of their property due to the violence.


Source: Chris Jarvis: The rise and fall of Pyramid Schemes in Albania.
IMF Working Paper, July 1999.