Chit Funds: A Poor Manns Bank

Abstract

The concept of chit funds is centuries old. In earlier days when banks were not very consumer friendly unlike these days, the Indians had an informal way of collecting and saving money which was based on trust. Various families gathered to collect a fixed sum of money each month, then decided who is to get the whole collection by draw of lots or by rotation. They selected a person amongst themselves to manage the way it is run. However every thing was based on trust so people started applying their own rules and logic to regulate it. The system gained more popularity amongst women as they could invest their saved house hold expenses for their own needs. The companies saw the growth in chit fund system, its potential and decided to launch various schemes to allure interested investors. Briefly speaking, a chit fund is India’s version of what is known overseas as Rotating Savings and Credit Associations (Roscas), also referred to as “the poor man’s bank”. As the name suggests, customers can save as well as borrow in such a scheme, where members make a fixed contribution every month for a maximum of 50 months.