BEWARE OF CHIT FUNDS

Easy things leave some hard ways of learning. One such example is chit funds, which are informal agreements between a set of people or a group. The group members agree to deposit a certain amount of money every month to an ‘administrator’, who happens to be the lead man of the group.

This is totally an informal set up based on the trust of the group members and high integrity of the ‘administrator’ who plays a key role in the ‘chit fund’ collection and its distribution among the members.

It works on a very simple formula of equal money being contributed by a group of people, for example 10 or more people. There are different capacity groups in which the member’s contributions vary and it can be as low as 10 and as high as 400 and above.

“If everyone is contributing 100 and the chit fund’s duration is 12 months, every month an amount of 1,200 is collected and any one of the members can claim the month’s collection based on internal bidding. For example, if someone from the group is in urgent need of money, he can bid for 100 or 200 less. He will get less the money decided in the bidding but will keep on depositing 100 every month till the end of the ‘fund’s’ duration. The chain continues till 12 months. The ‘administrator’ has the privilege to get the money in the first month without any bidding,” said a group member on the condition of anonymity.

This practice is prevalent mainly among small expatriate businessmen, who need urgent money for their businesses. The arrangement works well till the ‘administrator’s intentions are good and every member is contributing every month. Many, however, have emerged victims out of the greed of so called administrators of the ‘chit funds’ and find clueless as what to do, as such practice is totally informal and no one has any legal document to claim any right.

A smalltime businessman claims to have lost whatever he had deposited in the ‘chit fund’ due to the greed of the ‘administrator’ who claims to have not getting contribution from other members and the whole purpose of this ‘trusted group’ gets defeated.

He cautioned people not to join such ‘chit fund’ groups as you do not have any protection in the absence of any document. It is better to wait than join such groups which do not have any legal binding.

There are other victims who do not know how to retrieve the money they have deposited under the influence of some ‘trusted friends.’

All such victims have agreed that they have learned it hard way “not to join such groups in the hope of making some fast bucks.”

Thus, it is important to be cautious while doing any financial transition and it is always better to have dealings with established financial institutions.