Bank of England extends Funding for Lending scheme

The Bank of England's scheme has been criticised for failing to boost business lending

The Bank of England has announced plans to expand a lending scheme designed to help businesses and households.

The Funding for Lending Scheme (FLS), due to end in January 2014, will be extended for another year to 2015.

Banks will be given greater incentives to lend to small and medium-sized businesses, and creditors other than banks will be able to participate.

Since its launch in August, the scheme has been criticised for failing to boost lending.

The scheme is supposed to encourage banks to lend by offering them cheap loans on the condition they pass them on to customers.

Bank of England figures suggest banks took nearly £14bn from the FLS between August and December last year.

However, among participating banks, lending was actually lower in that six month period, than it was in the six months before the scheme was introduced.

Awareness of schemes

According to the Treasury, new incentive measures are designed to encourage banks to lend more by allowing them to borrow an extra £5 from the FLS for every £1 they lend to a small or medium-sized enterprise (SME).

In an effort to get banks to lend sooner, they will be able to borrow £10 in 2014, when the scheme is extended, for every £1 they lend in 2013.

The extension to the scheme has been widely expected. The Chancellor, George Osborne, first suggested the move in his March Budget.

Matthew Fell, CBI Director for Competitive Markets, said there were already signs of life thanks to the original plan, but that it needed to be widely publicised.

"Funding for Lending is only one piece of the finance jigsaw," he said.

Boosting firms' confidence by raising awareness of the various funding schemes available is critical."

Chris Leslie, Labour's shadow Treasury minister, welcomed the plan, but said more drastic action was needed.

"What we need is a proper British Investment Bank to get lending going to small and medium-sized businesses - wider action to kick-start our flatlining economy," he said.

Growth needed

In its most recent policy meeting, the Bank of England's Monetary Policy Committee said it saw "merit" in extending the scheme, as an alternative to an expansion of quantitative easing.

The move comes as Mr Osborne faces increasing pressure to find ways to boost the UK's economic growth.

On Thursday, the Office for National Statistics will publish its first estimates for growth for the first three months of 2013.

They are expected to show that the economy continues to remain flat, and international observers, including the International Monetary Fund (IMF), have questioned whether the chancellor should reconsider the pace of the government's austerity measures.