CHAPTER – II

CHIT FUNDS – A CONCEPTUAL OVERVIEW

2.1 INTRODUCTION

The activities of non-banking financial companies (NBFCs) in India have

undergone qualitative changes over the years through functional specialization. The role

of NBFCs as effective financial intermediaries has been well recognized as they have

inherent ability to take quicker decisions, assume greater risks, and customize their

services and charges more according to the needs of the clients. While these features, as

compared to the banks, have contributed to the proliferation of NBFCs, their flexible

structures allow them to unbundle services provided by banks and market the

components on a competitive basis1. The distinction between banks and non-banks has

been gradually getting blurred since both the segments of the financial system engage

themselves in many similar types of activities. At present, NBFCs in India have become

prominent in a wide range of activities like hire-purchase finance, equipment lease

finance, loans, investments, etc. By employing innovative marketing strategies and

devising tailor-made products, NBFCs have also been able to build up a clientele base

among the depositors, mop up public savings and command large resources as reflected

in the growth of their deposits from public, shareholders, directors and other companies,

and borrowings by issue of non-convertible debentures, etc. Consequently, the share of

non-bank deposits in household sector savings in financial assets, increased from 3.1 per

cent in 1980-81 to 10.6 per cent in 1995-96. In 1998, the definition of public deposits

was for the first time contemplated as distinct from regulated deposits and as such, the

figures thereafter are not comparable with those before2.

 The importance of NBFCs in delivering credit to the unorganised sector and to

small borrowers at the local level in response to local requirements is well recognised.

The rising importance of this segment calls for increased regulatory attention and

focused supervisory scrutiny in the interests of financial stability and depositor

protection.

In response to the perceived need for better regulation of the NBFC sector, the

Reserve Bank of India (RBI) Act, 1934 was amended in 1997, providing for a

comprehensive regulatory framework for NBFCs. The RBI (Amendment) Act, 1997

conferred powers on the RBI to issue directions to companies and its auditors, prohibit

deposit acceptance and alienation of assets by companies and initiate action for winding

up of companies. The Amendment Act provides for compulsory registration with the

RBI of all NBFCs, irrespective of their holding of public deposits, for commencing and

carrying on business of a non-banking financial institution; minimum entry point norms;

maintenance of a portion of deposits in liquid assets; and creation of reserve fund and

transfer of 20 per cent of profit after tax but before dividend annually to the fund3.

Accordingly, to monitor the financial health and prudential functioning of NBFCs, the

RBI issued directions to companies on acceptance of public deposits; prudential norms

like capital adequacy, income recognition, asset classification, provisioning for bad and

doubtful assets, exposure norms and other measures. Directions were also issued to the

statutory auditors to report non-compliance with the RBI Act and regulations to the RBI,

and Board of Directors and shareholders of the NBFCs4.

2.2 NON-BANKING FINANCIAL COMPANIES(NBFC‟S)

2.2.1 Definition:

According to the RBI (Amendment) Act 1997, A Non-Banking Financial

Company means

i. A financial Institution which is a company

ii. A Non-Banking Institution which is a company and which has its principal

business of receiving the deposits under any scheme or arrangement or in any

other manner or lending in any manner.

iii. Such other Non-Banking Institution or class of such institutions as the bank may

with previous approval of the Central Government specify5.

From the above definition, it is inferred that the principal business of Non-

Banking Financial Companies are as follows.

 Receiving Deposits

 Lending the Money

There is some difference between the banks and Non-Banking Financial

Companies. The primary difference is that the banks as well as the financial companies

are “PRODUCT DRIVERS” ie it is used to acquire a product such as car, house etc.,

whereas the NBFC‘s like chit fund companies are “PROCESS DRIVERS” ie it can be

used for an activity that a prudent subscriber considers relevant. Finally NBFCs cannot

issue cheques and demand drafts to their customers.

2.2.2 Types of Non-Banking Financial Entities (Regulated by RBI)

The various types of NBFC‘s are listed in Table No. 2.16

Table No. 2.1

S. Non-Banking Financial
Principal Business
No Entity

1 Non-Banking In terms of the Section 45-l(f) read with Section 45-

Financial Company i(c) of the RBI Act, 1934, as amended in 1997, their
principal business is that of receiving deposits or that
of a financial institution, such as lending, investment
in securities, hire purchase finance or equipment
leasing.
a) Equipment Equipment leasing or financing of such activity.
leasing company (EL)
b) Hire purchase Hire purchase transactions or financing of such
Finance company (HP) transactions.
c) Investment Acquisition of securities. These include Primary
company (IC) Dealers (PDs) who deal in underwriting and market
making for government securities.
d) Loan company (LC) Providing finance by making loans or advances, or
otherwise for any activity other than its own;
excludes EL/HP/Housing Finance Companies
(HFCs).
e) Residuary non-banking Company which receives deposits under any scheme
company (RNBC) or arrangement by whatever name called, in one
lump-sum or in instalments by way of contributions
or subscriptions or by sale of units or certificates or
other instruments, or in any manner. These
companies do not belong to any of the categories as
stated above.
Source: Secondary Data Continued...
 Table No. 2.1 Continued...

S. Non-Banking Financial
Principal Business
No Entity

2 Mutual Benefit Financial Any company which is notified by the Central

Company (MBFC) Government as a Nidhi Company under section
i.e., Nidhi Company 620A of the Companies Act, 1956(1 of 1956)

3 Mutual Benefit Company A company which is working on the lines of a

(MBC), Nidhi company but has not yet been so declared
i.e., potential Nidhi company by the Central Government, has minimum net
owned fund(NOF) of Rs.10 lakh, has applied to the
RBI for CoR and also to Department of Company
Affairs(DCA) for being notified as Nidhi company
and has not contravened directions/ regulations of
RBI/DCA.

4 Miscellaneous non-banking Managing, conducting or supervising as a

company (MNBC), promoter, foreman or agent of any transaction or
i.e., Chit Fund Company arrangement by which the company enters into an
Managing, Conducting or agreement with a specified number of subscribers
supervising as a promoter, or that every one of them shall subscribe a certain sum
foreman. in instalments over a definite period and that every
one of such subscribers shall in turn, as determined
by tender or in such manner as may be provided for
in the arrangement, be entitled to the prize amount.

Source: Secondary Data

 2.2.3 Type of Informal Credit Suppliers found in India (including

Financial Intermediaries):

The following are the informal credit suppliers found in India7:

1. Chit Funds: These are indigenous rotating savings and credit organizations.

While chit funds are prevalent among households and small businesses all over

India, chit funds are also organized by Chit Fund Firms, especially in South

India, and are regulated by the Chit Fund Act, 1961.

2. Finance Corporations: These institutions have activities essentially similar to

commercial banks, except for non-issuance of cheques and no provision for fund

transfer services.

3. Hire Purchase Firms: Such firms are generally active in vehicle and durable

finance, specializing in market segments not served by commercial banks. Most

of such firms accept deposits from the public.

4. Nidhis: These are single branch institutions similar to credit unions. They are

mainly found in South India.

5. Wholesalers and other Intermediaries: Such agents typically combine sale of

goods with trade credit. The volume of finance is large relative to the total size of

credit markets.

6. Arartiyas or Commission Agents: They act as intermediaries between local and

outstation sales in many commodity markets and provide financial

accommodation to their clients. Their main role however is in reducing

information costs of both buyers and sellers.

 7. Angadias: They play an important role in facilitating fund flows between

different centres at costs much below that of banks.

8. Indigenous Bankers or Shroffs: These age old Indian institutions serve

businesses, usually trade. They are grouped into various types (Multanis,

Shikarpuris, Gujaratis, Shekhawatis, Rastogis, Marwaris, Kayas, Chettiars etc.)

along community lines and operate in different parts of India. Among the major

groups, chettiars in the south have almost disappeared.

9. Brokers: There are bewildering arrays of brokers in informal markets whose

main and sometimes only role is informational. They link up potential borrowers

and lenders for various purposes.

10. Pawn Brokers: Found mainly in the South, they accept deposits and provide

pawn finance.

11. Money Lenders: While not as wide spread as in the rural areas, they rely on their

own capital and are to be found in all parts of India.

12. "Piggy-Back" Intermediaries: Their essential characteristic is in close

association with the formal credit markets. Along traditional lines, they are loan

brokers who undertake to obtain bank loans in their own names for a fee.

2.3 CHIT FUNDS

Chit funds, also known as Rosca (rotating savings and credit associations), are

India's oldest indigenous financial institution, catering to the credit gap in the country's

economy before the establishment of commercial banks. Operating in the informal

financial sector, they signify a vital community-based, micro-credit, quasi-banking

system. Internationally, such financial institutions have played a strong role in the

development of countries like Japan and South Korea. The chit fund industry in India is
estimated at Rs 20,000 crores (Ernst & Young), and accounts for 6% of country's savings

(Outlook Money, 2003). Despite the prevalence of banks, chit funds hold great

significance, as over 90% of financial assistance in India is provided by the small,

informal sector (Spectrum, 2005). At the same time, the public perception of chit fund

industry has been damaged by unscrupulous companies that have cheated on their

subscribers, usually salaried individuals and small traders. This has led the government

to regulate the industry with a heavy hand of bureaucracy. The Delhi Government runs

the chit fund department, administered by the Department of Finance, to control the

activities of chit fund companies in the state under the Madras Chit Funds Act, 1961 and

Delhi Chit Fund Rules, 1964. However, chit funds that started before 1961 are exempt

from the provisions of the Act. At the moment, there are 374 authorised chit fund

companies in Delhi, and those debarred are listed on the department's website.

To start a chit fund, a company firstly needs to obtain a certificate of

incorporation from the Registrar of companies. Then, it has to apply for the registration

of its bylaws with the Registrar of the chit fund department. If bylaws do not contradict

the Act, or rules framed under it, the Registrar issues a certificate of registration. The

process does not end here. To actually launch the chit fund, the company needs to obtain

a certificate of commencement from the Registrar, which is granted when it provides

security either by executing a mortgage of property to the registrar's satisfaction, or

depositing cash in an approved bank, or investing in government securities, to the tune of

at least half the chit amount, and transferring the mortgage/deposited cash/securities in

the Registrar's favour. The chit fund department stipulates that the foreman (person

responsible for conduct of the chit) is entitled to a commission/remuneration not

exceeding 5% of chit amount, and that minutes of all chit proceedings and agreements
should be filed with the Registrar. In case of complaints or grievances, involved parties

can either reach a mutual agreement through the chit fund panchayat or directly address

the civil courts or consumer forums.

A Chit Fund is a kind of savings scheme practiced in India. In a chit scheme, a

specific number of individuals come together to pool a specific amount of money at

periodic intervals. Usually, the number of individuals and the number of periods will be

the same. At the end of each period, there will be an auction of the money. Members of

the chit fund will participate in this auction for the pooled money during that interval.

The money will be given to the highest bidder. The bid amount will be divided by

number of members, and thus determining per head contribution during that period.

Usually, the discount will continue to decrease over periods. The person getting money

in the last period will receive the full scheme amount. Such chit fund schemes are

conducted by organized Financial Institutions or may be conducted between friends or

relatives8.

There are also variations of chits where the savings are done for a specific

purpose. Chit funds also played an important role in the financial development of people

of south Indian state of Kerala, by providing easier access to credit. In Kerala, chitty (chit

fund) is a common phenomenon practiced by all sections of the society. In Kerala, there

exists a company under the State Government, called Kerala State Financial Enterprises

(KSFE), the main business activity of it being the chitty business. Chit Funds are also

misused by its promoters and there are many instances of the founders running what is

basically a Ponzi scheme and absconding with their money. A Ponzi scheme is

a fraudulent investment operation that pays returns to its investors from their own money

or the money paid by subsequent investors, rather than from profit earned by the
individual or organization running the operation. The Ponzi scheme usually entices new

investors by offering higher returns than other investments, in the form of short-term

returns that are either abnormally high or unusually consistent. Perpetuation of the high

returns requires an ever-increasing flow of money from new investors to keep the

scheme going.

2.3.1 History of Chit Funds in India:

The chit fund schemes have a long history in the southern states of India. Rural

unorganized chit funds may still be spotted in many southern villages. However,

organized chit fund companies are now prevalent all over India. The word 'chit' is

derived from Hindi and refers to a small note or piece of something. The word passed

into the British colonial lexicon and is still used to refer to a small piece of paper, a child

or small girl9.

Chit fund is a perfectly Indian (most ancient) system of financial management,

even pre-existent of our banking system, which has the ability to provide excellent

returns for savers and lower borrowing cost to the borrowers, at the same time. From the

Income Tax perspective; Chit, Chitty or kuri is a transaction for mutual benefit and it

shall carry the status of "association of persons". Chit funds are regulated under the

Central Chit Fund Act 1982, hence could be assumed to have sufficient protection to the

subscribers of the chit. There is a Chit Agreement executed between the foreman (Chit

operator/manager) of the chit and each subscriber. There are also provisions of

inspection of Chit fund books, records and documents and audit of chit fund accounts,

which made this business transparent and reliable, to a great extent10.

 Apart from the above provisions, a licensed chit operator (in ancient times being

called as Panchajanya) has to file regular returns with the Joint Registrar of Chits

(J.R.C), which is a statutory authority notified by the concerned state government and

also with RBI on a regular basis. The Licensee also has to deposit Fixed Deposit Receipt

(FDR), usually in a Nationalized bank, favouring the JRC before he can commence any

group. This will be treated as a security and can be withdrawn by the licensee only at the

end of the group after he has satisfied the JRC that each member of the group has been

fully paid. A solvency certificate may be asked in some cases. The group can be started

and ―commencement certificate‖ procured from the JRC for each group separately, after

the deposit of such FDR.

The JRC ensures that the security lodged by the licensed operator as a FDR is

used in case the licensed operator defaults on payment to the rightful subscriber. In case

a chit company becomes Bankrupt or is not allowed to operate by a legal or statutory

directive, all the FDR's and immovable & movable properties belongs to the Chit fund

company are taken over by the JRC and distributed to the subscribers as enunciated in

the Chit Fund Act. Foreman is a person who is responsible for the conduct and

functioning of the Chit. Besides being an organizer of a Chit, he also happens to be one

of the subscribers of the particular chit group. He is entitled to obtain one chit amount

(generally first) without deduction. It is a good practice, if he ploughs back the entire chit

amount, to meet his future obligations, promptly. Subscribers are entitled to take part in

auction, even if they have paid only one instalment.

It is observed that small businesses are traditionally avoided by banks because of

their sloppy accounting practices and poor record keeping. It is also a welcome measure
for those who generally borrow at exorbitantly higher rates around 3% p.m. Hence as a

matter of fact, Chit fund could be used as a financial tool in the hands of small or

medium enterprises/ companies and they can efficiently manage their working capital

cycles, emergency capital requirements, contingent expenditure and rotational funding

needs with the help of Chits. It can nurture a business concern having seasonal nature, as

well. Small professionals or salaried employees could also use this investment option to

their economic benefit.

Functioning of Chit funds are better explained using an example. Take a typical

chit fund with 25 members contributing Rs.100 per week. This fund will run for 25

weeks. On the first week all members will contribute Rs.100. An auction meeting will be

conducted, and the foreman of the chit fund will preside over it. The total amount will be

Rs.2500. The auction will start with this amount. Bidders will start bidding by

discounting this amount (reverse bidding). Let us consider that the lowest bid is Rs.2150

(a discount of Rs.350). This amount (Rs.2150) is given to the winning bidder. Rest of the

amount (Rs. 350) is divided by 25, bringing the discount per person to Rs.14. This

discount amount is returned back to each member. Sometimes a part of this may be kept

by the foreman as service charges, usually in organized chit funds11.

Chit funds in India are governed by various state or central laws, like Travancore

Chit Act of 1945, Chit Funds Act, 1982 and Madras Chit Fund Act, 1961. Organized chit

fund schemes are required to register with the Registrar of Firms, Societies and Chits. In

North India common type of chit fund is where small slips with each members name are

written and gathered in a box .When all members gather for a monthly or weekly

meeting then the concern incharge in front of all members will pick up one slip from the

box and who so ever's name comes that person will be entitled to get the collection of
that day. Afterwards that person‘s name slip is torn and there after he comes for meetings

regularly and gives his kitty's (a fund made up of a portion of each pot in a poker game,

the pool of money, especially one to which a number of people have contributed for a

designated purpose) share but his name won‘t be there in the slips of box as he has

already collected his share.

Some chit funds may be conducted as a savings scheme for a specific purpose.

An example is the Deepavali sweets fund, which has a specific end date - about a week

before Deepavali. The Hindus in India celebrate many festivals. The Diwali or Dipabali

is one such festival celebrated on the new moon day after the Dasahara. This is a festival

of lights. The Hindus decorate their houses with lights. The rich and the poor, both

celebrate it. The festival has a legendary background. The Diwali has a great significance

for the Hindus. The businessmen consider it as the beginning date of their business.

Their business is renewed from this day. This day marks the end of autumn and the

beginning of winter. Neighborhood ladies will get together to pool their savings each

week. This fund will be used to prepare sweets in bulk just before the Deepavali festival,

and the sweets will be distributed to all members. Preparation of Deepavali sweets may

be a time consuming and costly activity for individuals. Such a chit will reduce the cost,

and relieve the members from excess work from an already tense festival season.

Nowadays, such special purpose chits are conducted by jewellery shops, kitchenware

shops, etc. to promote their products12.

2.3.2 Modus operandi of Chit / Functions or Operations of Chit Funds:

A chit scheme generally has a predetermined value and duration. Each scheme

admits a particular number of members (generally equal to the duration of the scheme),

who contribute a certain sum of money every month (or everyday) to the ‗pot‘. Chit

manager auctions out ―Pot‘ every month at a particular date. The highest bidder (also

known as the prized subscriber) wins the ‗pot‘ for that month. The bid amount is also

called the ‗discount‘ and the prized subscriber wins the sum of money equal to the chit

value less the discount. The discount money is then distributed among the rest of the

members (or the non-prized subscribers) as ‗dividend‘ and in the subsequent month, the

required contribution is brought down by the amount of dividend. The interested

members gather at the Chit Manager‘s office and put their bids. Actual auction lasts only

for five minutes. It is a convention that a bell is rung after closure of five minutes

indicating auction is closed. Highest bid at the bell shall be declared as ―Winning Bid‖. If

there is an equal bid then lottery method is applied to decide about the ―Wining Bid‖.

Foreman‘s commission is generally 5 % of the chit amount13.

When a member fails to make his monthly contribution, he is appropriately

communicated to that extent. After the continuous period of 3 months default, he may be

removed from the Subscribers List. Notice of such removal and substitution, if any, of

the new subscriber, shall be intimated to the Registrar. There may be partial recovery,

depending upon the solvency of the defaulting member. Registrar may attach his salary,

personal property or collateral, if given, towards the recovery of unpaid dues. If such a
member is absconding, his guarantors or sureties may be asked to make the payment.

Bank guarantees may be enforced, for the future repayment.

In all auctions commencing from the second instalment, subscribers can bid up to

a maximum of 30 per cent. If more than one subscriber offers an identical discount, the

prized subscriber (the subscriber who wins the prize) will be determined by lot. The

duration of the auction will be five minutes. Five per cent of the chit value will be

deducted from the bid amount towards the foreman‘s commission and the balance

distributed as dividend. Dividend rates are generally in the region of 10-15 per cent.

Chits can be seen in almost every society around the world, and have been in

existence for a considerable period of time. They are flexible and adapt themselves easily

to rural and urban peculiarities as well as existing community patterns of

grouping/organizing. This flexibility is one reason for their worldwide popularity.

2.3.2.1 Illustrating Chit as a witty investment:

The Chit Fund operation is illustrated in Table No. 2.2, explaining the concept

and the return on investment14.

 Table No. 2.2

Chit Fund Calculations for Chit of Rs. 1,00,000 with EMI of Rs. 2,000/-

Monthly
Cumulative
Inst. Monthly Cumulative Returns
Dividend Dividend
No Investment Investment (%)

1 2000 2000 0 0 0

2 2000 4000 0 0 0

3 2000 6000 700 700 11.7

4 2000 8000 700 1400 8.75

5 2000 10000 700 2100 7

6 2000 12000 700 2800 5.83

7 2000 14000 700 3500 5

8 2000 16000 700 4200 4.38

9 2000 18000 700 4900 3.89

10 2000 20000 700 5600 3.5

11 2000 22000 700 6300 3.18

12 2000 24000 700 7000 2.92

13 2000 26000 700 7700 2.69

14 2000 28000 700 8400 2.5

15 2000 30000 700 9100 2.33

16 2000 32000 700 9800 2.19

17 2000 34000 700 10500 2.06

18 2000 36000 700 11200 1.94

19 2000 38000 700 11900 1.84

20 2000 40000 700 12600 1.75

Source: Secondary Data Continued...

 Table No.2.2 Continued...

Monthly
Cumulative
Inst. Monthly Cumulative Returns
Dividend Dividend
No Investment Investment (%)

21 2000 42000 660 13260 1.57

22 2000 44000 660 13920 1.5

23 2000 46000 660 14580 1.43

24 2000 48000 620 15200 1.29

25 2000 50000 620 15820 1.24

26 2000 52000 580 16400 1.12

27 2000 54000 580 16980 1.07

28 2000 56000 540 17520 0.96

29 2000 58000 540 18060 0.93

30 2000 60000 500 18560 0.83

31 2000 62000 500 19060 0.81

32 2000 64000 460 19520 0.72

33 2000 66000 460 19980 0.7

34 2000 68000 420 20400 0.62

35 2000 70000 420 20820 0.6

36 2000 72000 380 21200 0.53

37 2000 74000 360 21560 0.49

38 2000 76000 340 21900 0.45

39 2000 78000 320 22220 0.41

40 2000 80000 300 22520 0.38

Source: Secondary Data Continued...

 Table No.2.2 Continued...

Monthly
Cumulative
Inst. Monthly Cumulative Returns
Dividend Dividend
No Investment Investment (%)

41 2000 82000 280 22800 0.34

42 2000 84000 260 23060 0.31

43 2000 86000 200 23260 0.23

44 2000 88000 100 23360 0.11

45 2000 90000 60 23420 0.07

46 2000 92000 40 23460 0.04

47 2000 94000 20 23480 0.02

48 2000 96000 0 23480 0

49 2000 98000 0 23480 0

50 2000 100000 0 23480 0

Total 100000 23480

Source: Secondary Data

Monthly Average Return % is 1.84.

2.3.2.2 Illustrating Chit as a prudent borrowing:

Surprisingly enough, it is worth noting here that from a borrower‘s perspective

also the rate of borrowing is on the lower side as compared to other credit options. The

following illustration is given in this respect15:

Chit Fund Value: Rs. 1,00,000/-

Monthly Subscription: Rs. 2,000/-

No. of Installments: 50 (Monthly)

Admission fees: Rs. 300/-

 Security to be furnished: Bank guarantee, immovable property, group company

deposit, assignment of LIC policy as per the provisions of the Act, 1st Auction goes to

the Company, which is required to be deposited with the Registrar.

1) If the borrower subscriber could get success in 2nd auction, situation will be as

follows:

Bid amount : Rs. 40,000/-

Prize Money : Rs. 60,000/-

Amount to be paid in balance 48 months : Rs. 72,520/-

(Net Amount after considering dividend for the remaining tenure)

Net Prize Money : 56,000/-

Cost of Borrowing : 16,520/-

Period : 48 Months

Rate of Borrowing (p.a.): 7.5 %

2) If the borrower subscriber could get success in 10th auction, situation will be

as follows :

Bid amount : Rs. 40,000/-

Prize Money : Rs. 60,000/-

Amount to be paid in balance 40 months : Rs. 62,120/-

(Net Amount after considering dividend for the remaining tenure)

Net Prize Money : 45,600/-

Cost of Borrowing : 16,520/-

Period : 40 Months

Rate of Borrowing (p.a.) : Approx 11 %

2.3.2.3 Tax Treatment on Chit Fund operations:

1) For investor: Monthly amount contributed shall represent investment. The

share of dividend shall be taxed according to the (accrual or receipt basis) accounting

system he follows. Discount foregone can be claimed as a deduction from the income on

investments.

2) For businessman: The discount foregone at the time of prizing the chit is an

admissible expenditure, depending upon utilization (Business purpose) of prize money

received.

2.3.2.4 Factors to be considered before joining a Chit Fund:

Irrespective of the fact that an investor or borrower is convinced about making

his investment in or borrowing from Chit Fund, in view of historic occurrences of

defaulting Chit Fund companies, following points may be verified meticulously;

1. Reliability of Chit fund

2. Transparent procedures & documentation

3. Web-sites of chit funds, to get to know more about the company and

management, its businesses and financials

4. Creditworthiness of Chit fund

5. Listing of company or its parent company (its reputation in the market)

6. Ability to serve the subscribers

7. History of its Chit fund business operation

8. Admission fees

9. Requirement of Guarantees, securities and sureties (for borrowers)

10. Other (hidden) costs, if any.

2.3.3 Advantages of Chit Funds:

The following are the advantages of Chit Funds:

i. The basic advantage of the chit is that it offers an opportunity for members to

save, and at the same time keep such savings fairly liquid and maximizing return.

ii. It facilitates the availability of a lump sum of money, which allows for higher

investment to be made earlier than accumulation of savings.

iii. Most chit funds are organized along democratic lines, where operating

procedures and other details are decided/ agreed upon by its members.

iv. Profits (in the form of bid amounts, for example) and other returns on

accumulated contributions are equally distributed to all members.

v. Risk of default is shared by all members and therefore sets up peer pressure to

ensure that all members make their contributions on time.

2.3.4 Disadvantages of Chit Funds:

The following are the disadvantages of Chit Funds:

i. There is a risk of mismanagement, fraud and bankruptcy by the organizer where

he absconds with the accumulated contributions.

ii. Timing of the receipt of funds by a member may not necessarily coincide with his

need for finance.

iii. The cyclical timing also applies to savings, where a member cannot save when he

has surplus funds, but has to wait for the chit meetings.
2.3.5 Rotating Savings and Credit Associations (ROSCAs):

Rotating Savings and Credit Associations can be found all over the world and go

by different names in different regions and countries16. The following is a sample of such

names:

Africa

 Benin: Asusu, Yissirou, Ndjonu, Tontine

 Botswana: Motshelo, beer parties

 Burkina Faso: Tontine, Tibissiligbi, Pari, Song-taaba

 Burundi: Upato (in Kiswahili)

 Cameroon: Jangi, Ujangi, Djana, Mandjon, Djapa, Tontine, Djanggi,

Njanggi, Ngwa, Ntchwa

 Egypt: Gameya, Jam'iyya

 Ethiopia: Ekub, Ikub

 Gabon: Bandoi

 The Gambia: Osusu, susu, esusu, Compin

 Ghana: Susu, Nanamei akpee, Onitsha, Nnoboa

 Ivory Coast: Tonton, Tontine, Moni, Diaou Moni, War Moni, Djigi Moni,

Safina, Akpole wule, Susu, Aposumbo, Kukule, a tche le sezu, Komite,

n'detie, m'bgli sika, Monu, mone

 Kenya: Mabati, Nyakinyua, Itega, Mkutano ya wanwake, Mkutano ya wazee

 Liberia: Esusu, susu, sau

 Madagascar: Fokontany

 Mali: Pari

 Mozambique: Upato, Xitique

  Niger: Adasse, Tomtine, Asusu

 Nigeria: Esusu, Osusu, Enusu, Ajo (Yoruba), Cha (Ibo), Oha, Oja, Adashi

(Haussa, Tiv), Bam (Tiv), Isusu (Ot), Utu (Ibo), Dashi (Nupe), Efe (Ibibios),

Oku (Kalabari Ijawas), Mitiri, Compiri, Club (Ibo)

 Congo, PR: Temo, Kitemo, Ikilemba, Kikedimba, Kikirimbahu, Likilimba,

Efongo Eambongo, Otabaka, Ekori, Otabi

 Senegal: Tontine, Nath

 Sierra Leone: Asusu, Esusu

 Somalia: Haghad, Shaloongo, Aiuto

 South Africa: Chita, Chitu, Stokfel, Stockfair, Mahodisana, Motshelo,

Umangelo

 Sudan: Khatta, Sanduk, Sandook Box

 Swaziland: Stokfel

 Tanzania: Upato, Fongongo

 Tchad: Pare

 Togo: Soo, Tonton, Sodzodzo, Sodyodyo, Abo

 Tunisia: Noufi, Sanduk

 Uganda: Chilemba, Kiremba, Upato, Kwegatta

 Zaire: Ikelemba, Osassa, Bandoi, Kitemo, Kitwadi, Adashi, Tontine, Bandal

 Zambia: Icilimba, Upato, Chilenba

 Zimbabwe: Chilemba, Stockfair, Kutunderrera

Asia

 Bangladesh: Samity

 Cambodia: Tontine
  China: Lun-hui, Yao-hui, Piao-hui, Hui, Ho-hui, Foei-Tsjing

 Hong Kong: Chinese types and Chit clubs

 India: Kameti, Kuri, Chitty, Chit funds, Vishi, Bishi, Nidhi, Committee

 Indonesia: Arisan, Paketan Daging, Paketan Kawinan, Mapalus, Bajulo

julo, Jula-jula, Mengandelek

 Japan: Ko, Kou, Miyin, Mujin, Musin, Tanamoshi

 Korea: Keyes, Kyes, Mujin, Ke

 Lebanon: Al-tawfir el medawar

 Malaysia: Kutu, Kootu, Kongsi, Tontine, Hui, Main, Kut

 Nepal: Dhikur, Dhituti

 Pakistan: Committee, Bisi, Kistuna

 Papua New Guinea: Hui, Sande

 Philippines: Paluwagan, Turnohan

 Singapore: Tontine, Kutu

 Sri Lanka: Chit Funds, Cheetu/Sheetu, Sittu Danawa, Situ Mudal, Sittu

Wendesiya

 Taiwan: Hui

 Thailand: Chaer, Hui, Hue, Pia Huey, Len Chaer

 Vietnam: Hui, Hui Thao, Hui hue hong, Hui bac (ho), Yi hui

 Yemen: Hacba

Latin America, Caribbean and Pacifics

 Bahamas: Esu

 Barbados: Meetings

 Belize: Syndicate, Tanda

  Bolivia: Pasanacu

 Brazil: Consorcio, Pandero, Syndicates

 Curacao: Sam, Hunga sam

 Dominican Republic: San

 Guatemala: Cuchubal, Cuchuval

 Guyana: Throw a box, Boxi money

 Jamaica: Partners, (Throw a) Box, Susu

 Mauritius: Pool, Cycle, Sheet

 Mexico: Tanda, Cundina, Mutualista ...

 Panama: Pandero

 Peru: Pandero

 Surinam: Kasmonie

 Tobago: Susu

 Trinidad: (E)susu, Sou sou, Hui, Chitty

 West Indies: Susu

 Western Samoa: Pelagolagomai

-------------------------------------

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