Nor Jaimah Kamaruddin, 38, was fined RM50,000 by the sessions court in Butterworth, Penang after pleading guilty to running the scheme with five others via Facebook. She raised over RM100,000 which was channelled directly into her bank account.
While the act of “playing kootu” is very common among blue-collar workers, there is a fine line between what makes it legal and illegal.
FMT takes a closer look into kootu funds and their legality in Malaysia.
What is a kootu fund?
A kootu fund is a scheme for savings and raising quick cash from contributions made by a group of individuals every week or every month.
The money from a kootu fund is withdrawn from the pool by the group leader and given to a participant, mainly by a lottery mechanism.
Kootu, called a tontine or chit fund in English, is popularly known in Malay as “main kootu” or “duit kootu”.
How does it work?
Imagine a scenario involving Abu and three others who decide to form a kootu. Each member pools RM500 per month.
Every month there would be RM2,000 in the pool. If one of them needs money immediately, he may make a bid for the pool.
Assuming Abu needs RM1,200 to buy a new phone, and no one else submits a bid to take the pool, Abu can take the pool money and the balance of RM800 will be distributed equally among the other three members.
The group will carry on every month until all members have each contributed RM2,000 to the pool.
Alternatively, instead of making bids for the pool, members could take turns each month to obtain the whole sum.
History
Chit funds were big business in Malaysia and Singapore in the mid-20th century and the industry was dominated in the 1970s by Gemini Chit Fund, a Singaporean company. However, the industry came tumbling down in 1973 when its founder Abdul Gaffar Mohamed Ibrahim was found guilty of three charges of criminal breach of trust involving S$3.2 million and was sentenced to life imprisonment.
It was estimated that 40,000 investors lost about S$50 million. The Gemini chit fund case led to kootus as a business being banned in Malaysia and Singapore.
Legality
According to the Registrar of Societies, the traditional kootu fund is legal when practised among family and friends because it is based on community values and trust.
However, it can be illegal when someone tries to make a business or to profit from these funds.
Former Malaysian Bar president Salim Bashir said that the Kootu Funds (Prohibition) Act 1971 states that it is unlawful for any person to run a kootu business and promote kootu funds.
“Business type kootus commonly entail criminal liability and any person who carries on such business shall be guilty of an offence,” he said.
The penalties for kootu have been enhanced since 2011 to a fine of RM500,000 or 10 years in jail.
While a kootu is almost always informal in Malaysia, countries such as India allow a kootu to be run as a business and are regulated.
A word of caution
Salim said kootu funds are still popular mainly among blue-collar workers due to the informal nature of its scheme.
“There are many who are ignorant of the laws governing kootu funds, which aim to prevent innocent people from losing their hard-earned money. The public must be educated on such schemes especially when it’s being used for profit,” he said.
Cuepacs secretary-general Abdul Rahman Mohd Nordin said that civil servants who “main kootu” are discouraged to do so. “Even if it is among friends and family there is a possibility that it could have a negative impact. And from the perspective of the law, a kootu business is illegal and should be avoided at all costs,” he told FMT.