What are Chit Funds?
Chit Funds are indigenous financial institutions unique to South India and predating commercial banks. They have stood the test of time, as evidenced by the growth in the number of chit fund companies in the South. However, the importance of any financial institution cannot be judged by its numerical strength alone, but by its performance. Tracing back the history of the origin of chit funds reveals that they evolved at a time when banking facilities had not developed, thus filling an important credit gap in the economy.
According to Section 2(b) of the Chit Fund Act, 1982, "Chit means a transaction whether called chit, chit fund, chitty, ‘kuri’ or by any other name by or under which a person enters into an agreement with a specified of persons that every one of them shall subscribe a certain sum of money (or a certain quantity of grain instead) by way of periodical instalments over a definite period and that each such subscriber shall, in his turn, as determined by lot or by auction or by tender or in such other manner as may be specified in the chit agreement, be entitled to the prize amount".
History of Chit Funds
The concept of chit fund has been around for over 10 centuries now. Hugely popular in developing countries, such as India, China, Pakistan and Central Africa, chit fund is one of the best sources of saving money for low-income groups, salaried people and the self-employed. In the book written by Edith Jemima Simcox, there is reference to the Malabar ‘Kuri’ system that existed from ancient Dravidian times and is somewhat similar to the systems in China. In China it developed to what is popularly known today as the Chinese lottery.
Erstwhile ruler of Cochin State, Raja Rama Varma gave loans to Syrian Christian traders and retains a certain portion of the loan for administrative and other expenses. Later, to manage the increasing numbers of loan seekers, he ordered a cast of lots and gave the accumulated amount to those who drew the lot on the principle of equity. The real streamlining of operations was somewhere between 1830 and 1835, when the Chaldean Syrian church started ‘Kuries’ under its name and issued passbooks to subscribers as evidence of enrolment.
History of Chit Funds
In South India, ‘Ari Kuri’ or ‘Nellu Kuri’ (or Rice Chits) was there, where rice was exchanged instead of money. In villages, group of people used to collect rice in small measures and make the heap. Every member contributes a certain quantity of rice during every harvest season (that is, twice or thrice per year). The contributories gather together to take a lot and one person (supposedly selected by draw of lots; but in practice determined by the nature of the need of the person) gets the whole contribution minus the "commission" for the person who conducts the chitty. In South Kerala this was known as Chit and in North Kerala this was known as ‘Kuri’. The history of Karappara Chit Funds also has its roots in the ‘Ari Kuri’ schemes in its early days. The image beside is the document from the year 1939 used for the ‘Ari Kuri’ scheme by our forefathers.
Commercialisation of Chit Funds
A study conducted by the Institute for Financial Management and Research (IFMR) in India concluded that over thousands of crores of rupees are circulated through chit fund. Andhra Pradesh topped with 1.4 million households participating in chit funds circulating $1.6 billion. Tamil Nadu stood second with participation by 800,000 households circulating $820 million. Although the Indian banking sector has made enormous leaps in terms of offering several lucrative and innovative financial products and services to a large section of the population, chit funds remain the most popular option among the low and middle-class sections. Also, chit funds require less documentation and are quite hassle-free. Besides, the chit amount is also collected from the subscriber's doorstep. The estimated turnover of chit funds in India is $4 billion.
