Bidding merry-go-rounds and chit funds: how auction rotations work

In a standard merry-go-round the payout order is fixed in advance. In a bidding merry-go-round, the order is decided each round by auction. Members who need money now offer to take less than the full pot, and the difference is shared with everyone else. It's one of the fairest answers to the question "why should early members get an interest-free loan?" (which we cover in is a merry-go-round worth it?).

The model is widely used. Formal chit funds in India run on it, as do many rotating groups across Asia, Africa and Latin America.

#How a round works

1. Every member who hasn't yet received the pot may bid.
2. A bid is the discount the member is willing to give up.
3. The highest discount wins the pot for that round.
4. The discount is shared out, usually by reducing everyone's contribution that round.
5. Members who have already won keep paying but don't bid again.

In the final round only one member is left, so there is no auction; they receive the full pot.

#A worked example

Ten members each contribute KES 5,000 a month, so the full pot is KES 50,000.

In month three, two members need money urgently. One bids a KES 4,000 discount, the other KES 6,000. The higher bid wins.

• The winner receives KES 44,000 (KES 50,000 − 6,000).
• The KES 6,000 discount is shared across all ten members: KES 600 each.
• So everyone, including the winner, pays KES 4,400 that month instead of 5,000.
• Ten members × KES 4,400 = KES 44,000, exactly what the winner receives.

The winner paid KES 6,000 for early access, which is effectively interest. The members who wait receive that interest as lower contributions. Early money has a price, and late members are paid for waiting.

#Rules your group should agree

Write these into your merry-go-round rules before the first auction:

• Maximum discount. Cap bids (for example at 30% of the pot) so a desperate member can't sign away most of their money.
• Tie-breaks. Agree a random draw if two bids are equal.
• Sealed or open bids. Sealed bids (written or sent privately to the organiser) reduce pressure. Open bids are faster but can become heated.
• Organiser fee. If the organiser takes a commission, state it in writing. Formal chit funds cap it; among friends it's usually zero.
• After you win. A winner must keep paying until the cycle ends. Put winners' continued payments first in your collection routine.

#The risks to watch

Default after winning is the biggest risk, just as in any rotation. A member who wins early at a large discount has taken a big sum and still owes many contributions. Common protections are a guarantor, as described in our guide to guarantors in group lending, or a rule that newer members can't bid in the first few rounds. Our guide on when a member doesn't pay covers the follow-up.

Discounts that spiral. In hard times many members bid at once and discounts climb. A cap protects members from themselves.

Record-keeping. Every round now has a different contribution amount and discount. Keep a clear table of round, winner, discount, per-member share and amount paid. A shared spreadsheet or dedicated software beats a notebook here.

#Is bidding right for your group?

Bidding suits groups where several members have urgent, competing needs and others are happy to wait in exchange for a return. It suits less well groups that value simplicity or include members who may feel pressured in an auction. A good compromise is to fix the first few positions by need and auction the rest.

To compare this with other traditions, see our guides to stokvels in South Africa and chamas in Kenya.

Frequently asked questions

Who receives the discount in a bidding merry-go-round?

Usually it is shared among all members, most often by reducing everyone's contribution for that round. Some groups pay it into a group reserve instead.

Can the same person win twice?

No. Each member can take the pot only once per cycle. After winning, they keep contributing but no longer bid.

Are chit funds legal?

In some countries formal chit funds are regulated businesses. India's Chit Funds Act, for example, requires registration and caps the organiser's commission. Informal bidding circles among friends are a different thing, but check local rules if you charge a fee or take members from the public.

This guide is general information to help groups organise themselves. It isn't financial, tax or legal advice — rules for savings groups differ by country, so check with a qualified adviser for your situation.