KARACHI, Jan 21: Small and medium enterprises are seeking insurance cover for their business activities and are demanding that an insurance company guaranteed by the government be established.

The SMEs feel that commercial banks and development finance institutions (DFIs) are reluctant to finance and provide funds to such enterprises as they are not secured against losses caused due to various reasons and are insisting on collaterals.

In a meeting recently held under chairmanship of Union of Small and Medium Enterprises (Unisame) convener Zulfikar Thaver, it was also pointed that despite the State Bank's Prudential Regulations wherein banks and DFIs were advised to finance SMEs on cash flow basis, the lenders are reluctant to oblige.

Keeping in view this attitude of the banks and DFIs, the SMEs hired consultants to devise a foolproof system whereby an intermediary agency could make a contract and promise to pay and secure lender against the failure of the borrower to pay.

The Unisame experts have drawn a plan and advised the ministry of commerce to establish an insurance company guaranteed by the government and make it compulsory for all banks and DFIs to obtain cover from the state insurance company against losses caused by non-recovery of debts to SMEs.

Under this system banks and DFIs will be fully covered and the insurance company will earn revenues more than sufficient to pay for losses due to contingencies. This system is prevalent in all advanced countries of the world.

In a way the burden of losses will be shared by all the SMEs because borrowers of finances will be paying premium on loans obtained by them and the burden of risk is collectively/jointly covered by the insurance company.

A similarly scheme providing insurance cover could also be implemented in the agriculture sector and can bring a wide ranging change in the farmer community by improving their lot on having easy access to finances to purchase inputs and agriculture machinery.