Are cheetu Illegal?

Cheetu or Rotating Savings and Credit Associations (RoSCAs) are the world over a well-recognised method of savings and capital accumulation for the poor and marginalised.

Advocate E.B. Wikramanayake B.A., in his Legal Dictionary for Ceylon (1948 Edition) describes a cheetu club as ‘an arrangement by which a number of persons join together and contribute money weekly or monthly to a fund which is distributed among the members in a certain manner. At the end of the week or month when all the subscriptions for that period have been paid in, there is a drawing among the members by lot and the whole sum is paid to the member who has drawn the winning ticket. This goes on until each of the members has in his turn got the amount of weekly or monthly subscriptions, those who have already drawn the money being obliged to pay the agreed subscription until the list of members is exhausted.’

Cheetu or RoSCAs in a variety of forms are found in every city, every village community and every workplace in the world, however developed or underdeveloped. A RoSCA is essentially a group of individuals who agree to meet for a defined period of time in order to save and borrow together.

Poor man’s savings bank

RoSCA have been branded as the poor man’s savings bank, where money is not idle for long but changes hands rapidly, satisfying savings, consumption and production needs.

The system is one in which, say a group of 10 persons contribute say Rs. 100 a month for 10 months, one of them draws the Rs. 10,000 collected each month by drawing lots, once in the cycle; a person is entitled to the Rs. 10,000 only once in the 10 month cycle.

They vary only according to the particular cultural norms of that society. Sometimes the collector who holds the money charges a fee, or the right to draw one month’s collection. Sometimes the whole month’s collection is auctioned to the highest bidder among the group for a discount, each month, again a person is eligible for this only once in the cycle.

In some cheetus an item like a bed, a TV set or a cupboard is offered monthly on payment of the total monthly collection by a vendor who supports the cheetu. It is organised among a homogenous group of people who trust each other to make the monthly payments in a disciplined manner and await their turn for the reward patiently. It is one effective way in which poor people can accumulate capital to make investments.

Registration and control of cheetus

In Sri Lanka, in colonial times, the British administrators realised the important role the cheetu played among the people and in 1935 enacted the Cheetus Ordinance No. 61, to ‘provide for the registration and control of cheetus’.

This was mainly due to the fact that although cheetu were widely in operation, the courts had held that cheetu violated the Lottery Ordinance No. 8 of 1844 – Sinnadurai vs. Chinniah ([1906] 10. NLR 5). The participants in cheetu needed legal protection; this was why the Ordinance of 1935 was enacted. In this Ordinance a cheetu is defined to mean a scheme or arrangement based wholly on the terms and conditions set out in Section 3 of the Ordinance, but does not include any scheme or arrangement as laid out in Section 4.

Section 3 provides that for a cheetu within the meaning of the Ordinance to take place, the subscribers and the manager of the arrangements must agree upon and adopt each of the following essential terms and conditions: that the cheetu has to be for a specific amount for a specified number of subscribers only, that the subscribers are to contribute equal portions of the amount, each contribution should be paid to the manager in equal instalments of a specific value within a specified timeframe not exceeding 30 months, the instalment has to be paid on a specified date or within a specified period of days of grace, on the ate the instalment is due – the manager has to put the whole collection up for sale among the subscribers either by auction or sealed tender, each subscriber is entitled to the total only once in the specified period, each bidder must state he amount he is willing to discount for the privilege of getting the whole amount, the subscriber who offers the highest discount is entitled to the whole amount less discount, the winner is entitled to draw the prize only on him providing security to the manager for due payment of his future instalment obligations, the manager is entitled to appropriate for commission and working expenses – incurred costs, etc., a specified sum or a specified proportion of the prize on that occasion, the balance of the discount is to be distributed in equal proportion among all the subscribers.

Section 3 also provides that where the manager of the cheetu also is a subscriber, he will be not entitled to bid or tender for the whole amount and will be entitled to the final cheetu of the total instalments payable in the last month.

Section 4 of the Cheetu Ordinance goes on to provide that any scheme or arrangement which does not include the factors listed in Section 3 is deemed only to partake in the nature of a cheetu. A prohibition on schemes as defined in Section 4 is enacted by Section 5, which also makes any claim under such scheme unenforceable by law.

Cheetu Ordinance and amendments

The Cheetu Ordinance has as far back as in 1935 carefully laid out regulations to regulate cheetus. Subsequent amendments in 1936, 1941, 1945, 1949, 1955 and 1957 have fine-tuned the legal regime pertaining to cheetus.

By Act No. 34 of 1957 the Registrar of Companies was designated as the Registrar of Cheetus. Section 9 requires the Registrar to: register all cheetu in a book, endorse the fact of registration and the registered number on the written agreement, required by Section 7, and all copies under his signature, return the original agreement so endorsed to the manager of the cheetu and file the duplicate so endorsed in his office.

Section 10 provides that the manager of the cheetu has to deliver to all subscribers a certified copy of the registered agreement endorsed by the registrar. The Ordinance provides rules as to meetings of subscribers to a cheetu, keeping the minutes of such meetings, copy of minutes to be forwarded to the Registrar, alteration of cheetu agreement, receipts for instalments paid by subscribers, security to be provided by managers of cheetus, security to be provided by the successful subscriber who purchases a cheetu, etc.

The Ordinance by Section 19 provides that when the successful purchaser does not provide the security required, the prize money is to be deposited in a bank account. The ordinance also provides for situations such as substitution of subscribers when an existing subscriber defaults, voluntary reduction of numbers of subscribers, books to be maintained by the manager, the manager’s liability to subscribers, what happens when the manager dies or becomes incapacitated.

The Ordinance provides a cheetu will be terminated on the expiry of the agreed period or nay voluntary reduction of membership, the failure of the manager to comply with the obligations imposed by the Ordinance, when the manager is declared insolvent, etc.

There are also special provisions in Part V for companies, firms and individuals trading under business names which participate in cheetu. Part VI provides fees payable to the registrar for the various steps required by the Ordinance.

The Minister has been given the power of making regulations for carrying into effect the provisions and principles of the Ordinance. The ordinance also provides for offences and penalties. There are special provisions in Part VII relating to cheetus actually conducted at the date of the commencement of the Ordinance.

A unique piece of legislation

From the foregoing it is clear that there exists an exhaustive and detailed legal regime relating to the operation of cheetu from 1935 to date – a period of over 66 years. When compared with legal regimes which govern RoSCAs worldwide, Sri Lanka has a long history of formal law governing this financial instrument, while in most other jurisdictions, RoSCAs are still controlled by informal customary procedures.

In the West Indies and the Caribbean, RoSCAs re known as Susus, in Cambodia as Tontines, in Korea as Wichin Gye, in Indonesia as Arisan, in the Democratic Republic of the Congo as Likelembas, in Mozambique as Xitique, in the Cameroon as Djanggis. This indicates the spread and the popularity worldwide.

RoSCAs have to be distinguished from Accumulating Savings and Credit Associations (ASCAs) in which the money is accumulated for a fixed period, loans are made from the fund and after the fixed period the original contribution and the interest made on loans made are refunded.

Rarely is there extensive legal regulation of RoSCAs similar to the Cheetu Ordinance in Sri Lanka. Indeed it may be said to be a unique piece of legislation. The Cheetu Ordinance has brilliantly formalised an essentially informal process and given it legal recognition and status – a situation which is unique worldwide.

Current legal status

The issue of the current legal status of cheetu/RoSCAs arises due to the recent enactment of the recent Finance Business Act No. 42 of 2011. This law which is effective from 9 November 2011 repeals and replaces the Finance Companies Act No. 78 of 1988.

The purpose of the Act is to: enable effective supervision of finance companies licensed with the Central Bank and to enable effective action against deposit taking businesses without authority. The Act provides that acceptance of deposits of cash from the public without authority is an offence.

Section 73(1) defines ‘Deposit’ as: a sum of money paid on terms under which it will be repaid, with or without interest, either on demand or at a time or in circumstances agreed upon, by the person making the deposit and receiving it.

A copy of the Finance Business Bill is available on the internet, and assuming that there were no amendments in the enactment process, Section 3 of the Act provides that the Act will not apply to licensed commercial or specialised banks, any other institution other than a finance company licensed under this Act, exempted in terms of Section 76A of the Banking Act, a cooperative society or an institution exempted from the application of this Act by any written law for the time being in force.

Further, Section 72 of the Act provides that in the event of any conflict or inconsistency between the provisions of this Act and the provisions of any other written law, the provisions of the Finance Business Act will prevail.

The issue now is whether payments made by a subscriber to a cheetu are deposits in terms of this new Finance Business Act and acceptance of the deposit an offence. Taking the definition of deposit as in Section 73(1) of the Act it would seem to be a violation of the law, since the subscription is accepted on terms that it will be repaid, at a time agreed upon by the persons making it and the person accepting it. A cheetu transaction would constitute the offence of ‘accepting of deposits without authority’ in terms of the new law.

If this is the current legal position, it would cause serious repercussions in the informal economy in which cheetu of various types, those to which the Cheetu Ordinance applies to and those to which the Ordinance does not apply will all be illegal in terms of the new Finance Business Act and constitute offences.

One of the most customary, traditional (with a legislative history going back to 1935, with periodical demand led amendments responding to situations on the ground), a popular and simple method of capital accumulation by entrepreneurs in the small and micro sectors of the economy, housewives, office, factory and plantation workers, cutting across all sectors, levels and classes of the economy and civil society will cease to have the protection of the law (unique to Sri Lanka) and would be illegal.

It is strongly recommended that cheetu as defined and governed by the Cheetu Ordinance Chapter 190 of the Legislative Enactments of Sri Lanka be exempted from the provisions of the Finance Business Act No. 42 of 2011, by an amendment to the Act. Otherwise, sadly, it will lead to the demise of a unique indigenous financial service, benefiting the marginalised and poor in particular, recognised by law for over 66 years.

(The writer is a lawyer, who has over 30 years experience as a CEO in both government and private sectors. He retired from the office of Secretary, Ministry of Finance and currently is the Managing Director of the Sri Lanka Business Development Centre.)