Rotational savings schemes ‘mchezo’

I am a recent college graduate who is lucky to have secured employment. I have been approached by a co-worker, about a promising ‘financial opportunity’. This person explained to me that some colleagues at the office have a rotational savings scheme where participants contribute a fixed amount and, in return, take turns to receive a larger pay out from the pool of funds. Of course I was intrigued because the arrangement sounded interesting. However, I want to make sure this arrangement is legitimate. Are these kinds of schemes regulated by law? Please enlighten me.
HG, Kilimanjaro

Rotational savings schemes have been operating for years in many places. Nonetheless, this kind of saving scheme is informal and involves participants contributing a fixed sum of money that is given out to an individual or individuals within the group on a rotational basis. These informal savings groups are generally considered a high-risk investment. They rely on trust among participants in making their contributions, something which is not guaranteed. For that reason, in some jurisdictions, such schemes have been declared illegal and are considered as a form of fraud. In the case of Tanzania, a study commissioned by the Bank of Tanzania discovered that rotational saving schemes famously called ‘mchezo’ are often used to supplement formal financial savings structures. In some instances, these informal financial groups even provide credit to participants against conventional banking practices.

Our review of relevant laws and regulations reveals that these saving groups are a grey area because their operations are informal. However, if the said savings scheme operates as a pyramid scheme, section 171A of the Penal Code, [Cap. 16 R.E. 2022] is clear that it will amount to an offence. In general, a pyramid scheme promises substantial amounts of money upon little investment. This arrangement is not sustainable eventually leaving many people with significant financial losses. Please be informed about the risks before you decide to be involved in the savings scheme. Your lawyer can guide you further.