We have something like this in my neighborhood too. It's hosted in someone's basement and consists of dozens of bins labelled by age/size and clothing type. It operates pretty much like a library where people take some things they like and return them when their child outgrows them. Over time I've seen the same shirt/whatever on multiple different children in the community.
This mostly works for children's clothes because children tend to outgrow them well before they wear out. It might not work so well for adult garments. I tend to keep my clothes till the patches start overlapping, then I turn them into rags for the local maker space.