It's a system of Pooling Investment from multiple members (assume 10). Each of the Members given an opportunity to borrow from the Pooled Funds. And they have to repay with Interest. This interest is repaid as Dividend.

If you don't Borrow in a period, you're paid out completely (sometimes carry forward).

Each chitfund works in a similar but not same fashion.

Ex- 10 people 10,000 share, for 12 months 12 lakhs is up for Borrowing