Chit Funds is a 1000 years old financial instrument intimately connected with millions of people in developing countries. Chit Funds is in practice in India, Central African countries, China, Pakistan and other south-east asian countries. Chit Funds is popular among the low-income group, self-employed and salaries class. A study by the institute for financial management and research (IFMR) has found chit funds prove to be successful providing an innovative access to finance for low income households. Study was conducted in India. Study was funded by Bill & Melinda Gates Foundation.
The findings were recently submitted to the Indian Finance Minister Pranab Mukherjee.
Based on the data available for 2006, the study showed that Andhra Pradesh topped the five States with 1.4 million household participation in chit funds ( 7% of the total households) and 1.6 Billion US Dollars circulated through chit schemes. Tamil Nadu another state had 800,000 households participation (five per cent of the total) with 820 million US Dollars in circulation.
The research showed that on an average 50% of the chit fund members are below poverty line (household consumption less than 1.5 US dollars a day). Self employed and salaried employees formed a major part (78.9%) of the membership of chit fund schemes.
The interest charged per annum ranged from 8% to 28%, though higher than bank loans, was lower compared to 24 to 36% charged by other private financiers. Plus, the chit funds provided better returns on the investment than other options available to members.
It said people find the chits more advantageous as they require less collateral and documentation. The chit amount is collected from the participants at their doorstep on a flexible when the participants are able to pay. The businessmen also find it more useful for easy money rotation than bank loans.
In India alone chit funds’ turnover is estimated to be 4 Billion USD. In Africa 20% of house hold savings is accumulated through Chit Funds.