“Kootu”, also known as tontine, is a money-pooling arrangement where members contribute a fixed amount regularly and take turns receiving the entire sum collected.

For example, if 10 people contribute RM1,000 each month, one participant receives the RM10,000 pool in the first month.

Another participant receives the same amount the following month, with the rotation continuing until everyone has had a turn.

It may sound like an informal savings plan with extra steps. So, why is it risky and, in some instances, illegal?

According to the Registry of Societies, a traditional kootu fund practised among family members and friends is legal as it is based on community values and mutual trust.

Federation of Malaysian Consumers Associations (Fomca) chief executive officer Dr Saravanan Thambirajah agreed, describing the traditional form as an informal savings arrangement built largely on trust.

“Whether kootu is wrong depends on how it is conducted.

“However, there are also people who operate it as a scam or investment, including schemes involving gold and other items.

“Usually, these arrangements do not fall under legal protection. The biggest concern is that the person who receives RM10,000 in the first month may disappear with the money, affecting the other participants,” he told the New Straits Times.

Under the Kootu Funds (Prohibition) Act 1971, a kootu fund includes an arrangement in which participants make periodic contributions to a common fund, which is then distributed through a ballot, bid, auction or other methods.

Section 3 of the act makes it unlawful to carry on the business of promoting a kootu fund. Those involved in managing, organising, conducting, aiding or assisting such a scheme may face a fine of up to RM500,000, imprisonment of up to 10 years, or both.

Saravanan said such schemes could also raise concerns under the Financial Services Act 2013.

He advised people against participating in such arrangements to protect themselves from financial losses and legal risks.

“If a person absconds with the money, there may be limited legal recourse. If a kootu scheme comes under police investigation, everyone involved may face legal consequences.”