Amid the setbacks affecting India’s microfinance market an old time tradition has emerged with potential to provide an alternative for economic mobility.
‘Chit funds’, which exist in both formal and informal settings, are savings groups that offer return investment through either a raffle or bidding system. Although the method has been popular worldwide for centuries, India is the only country where it has a formal existence in the private sector.
An informal chit fund consists of a small group of people (usually women) pooling their savings. Every month everyone contributes an equal amount, and every month a member of the group has the chance to win the pool. Each member can only do so once until everyone has had a chance to “win.” The formal arrangements are more or less the same, but instead of choosing one of their own to handle the fund, members hire a private company to do so, and the savings pools tend to be much larger. Typically in either arrangement the appointed treasurer (or company) makes about five percent of the total pool every month.
The appeal? Chit funds rely on saving rather than lending, making them more stable. And their popularity has soared—the largest chit fund consists of over 800 million dollars, writes The Economist. With new microloans down approximately 40 percent in the past year, chit funds may offer a safer, more stable means of financial mobility.