Is It Lawful To Participate In Kootu Funds Scheme In Malaysia?

• Law Firm: Kevin Wu & Associates
• Subject Matter: Finance and Banking, Government, Public Sector, Financial Services, Fund Management/ REITs, Money Laundering
• Author: Ms Nurin Husnina
• Published date: 03 February 2023

Interpretation of kootu fund

Kootu fund is defined as a scheme or arrangement variously known as kootu, cheetu, chit fund, hwei, tontine or otherwise whereby the participants subscribe periodically or otherwise to a common fund and such common fund is put up for sale or payment to the participants by auction, tender, bid, ballot or otherwise and includes any scheme or arrangement which with variations partakes of the nature of a kootu, cheetu, chit fund, hwei or tontine¹.

Succinctly, kootu fund is a pool of money raised by contributions of a group of individuals to a common fund at regular intervals, consisting of a previously agreed amount of money periodically on a weekly or monthly basis.

History of kootu funds

Kootu funds were predominantly and substantially practiced amongst family members, friends and/or within a small group of villagers for an easy acquisition of extra amount of money. It is found to be user friendly by the participants considering that the scheme is treated as a micro-financing scheme. The scheme is built on the basis of mutual trust amongst family members and close friends. It is not profitable in nature, but it serves as a financial support to the participants².

Kootu funds were considered as a huge business in Malaysia and Singapore in the mid-20th century and the industry was dominated in the 1970s by Gemini Chit Fund Corp Ltd, a Singaporean company³ which was managed by Abdul Gaffar Mohamed Ibrahim as the founder of the historic scheme. The founder managed to attract public subscription and enrolled up to 50,000 members whereby the lure was the promise of unusually high returns on investment⁴. However, sometime in 1973, Abdul Gaffar pleaded guilty for three charges of criminal breach of trust amounting to $3.2million. The estimated loss was about $50million⁵. He was therefore sentenced to life imprisonment. Choor Singh J, the judge sitting on bench for this matter then dubbed the case as "the swindle of the century" and thereafter this case was marked as the biggest white-collar crime in Singapore⁶. The sentence imposed to Abdul Gaffar marks the tumbling down of chit funds businesses. As a consequence thereof, chit fund was banned in both Malaysia and Singapore⁷.

The law governing kootu funds

Kootu funds in Malaysia is governed by Kootu Funds (Prohibition) Act 1971 (hereinafter referred to as "Act 28") which was enacted to prohibit the registration or licensing of businesses which promote or designed to promote kootu funds...