A chit fund is a typical saving scheme practiced in India. It was originated in Europe and was popularly known as pyramid scheme. From time immemorial, money has always been borrowed from lenders in exchange of gold, land or valuable items.
Chit fund is basically know as’ chiity’ or ‘kuri’ in India and it is extensively practiced in states like Rajasthan, Kerala and Tamil Nadu.
HOW DOES ITS WORKS?
Suppose a person deposits 1000rs ($17), every month.
Similarly 50people like him deposits the same or more amount.
So net principal becomes=1000*12*50=6lakhs ($200)
This net amount is auctioned in various fields like constructions; share markets and underworld gambling. This interest feeds the company’s employees and its customers. The downfall occurs when there is a slowdown in economy or landslide in share market. In that case the chit fund company endures a huge loss impacting the root customers.
IS HOLDING A CHIT FUND COMPANY ILLEGAL?
Operating or holding a chit fund is legal. The concept is very unique with several merits. It provides jobs to many unemployed youths; secondly it boosts up micro finance, household development and promises a smile to many customers.
E.g.; a poor farmer keeps a part of his income in the chit fund company for a hope of getting a large interest to meet his daughter’s marriage in future.
WHY THEY ARE SO POPULAR?
Chit funds schemes are usually lucrative. They drag attention of customers and convince them to keep their money in the company.
They are eye-catching because they provide huge interest (somewhat double the government banks) and are almost hassle free (no documentations or official work is required).
WHAT IS PONZI SCHEME?
Ponzi is a fraudulent investment operation that pays a very high rate of interest usually 10-15%. It was usually named after Charles Ponzi in 1920, who was notorious for fraud investments.
Although it is prescribed by ministry of finance, but the entire power lies in the hands of state government. As a result lots of unimportant laws is created.
WHY THE SYSTEM COLLAPSES?
• External market forces
• Weak economy
• Withdrawal of quick cash
• Declining economy
• Poor share markets
• Demanding agents