The concept of chit funds is indigenous to India and originated more than 1000 years ago. Initially it was in the form of an informal association of traders and households within communities, wherein the members contributed some money in return for an accumulated sum at the end of the tenure.
It is a mechanism that combines borrowing and savings in a single scheme. In a chit fund scheme , a group of individuals come together for a pre-determined time period and contribute to a common pool at regular intervals. Every month, up until the end of the tenure of the scheme, the collected pool of money is loaned out internally through a bidding mechanism to the most deserving member. This way, people who are in need of funds and those who want to save are able to meet their requirements.
Chit funds are equivalent of the Rotating Savings and Credit Associations (ROSCA) that are famous throughout the world. ROSCAs are a means to "save and borrow" simultaneously. It is considered one of the best instruments to cater to the needs of a customer. It enables people to convert their small savings into lump sums.