BoE Extends Funding for Lending

Bank of EnglandThe Funding for Lending Scheme, which was due to end in January 2014 has been extended until 2015.

Speculation at the weekend that George Osborne would look at extending the Funding for Lending Scheme (FLS) ended this morning when the Bank of England announced that it would continue the scheme beyond its initial deadline date.

FLS will now run for another year and end in 2015.

The scheme, launched last year, promised low-cost lending to banks in return for them offering reduced rates to homebuyers and businesses.

The £80 billion scheme has been criticised for not only falling to lend as much as was expected but also for not lending to SMEs.

Usage and lending data, published in March, has shown that just £13.8 million of loans were tapped into since the launch of FLS.

Since the figures were published, Business Secretary Vince Cable admitted that the scheme would need some "adjusting".

Furthermore, the banks participating in the scheme were criticised for actually lending less since the scheme launched than they had prior to FLS.

Some Adjusting

Under the new extension, the Funding for Lending Scheme is being "heavily skewed towards SMEs".

For every £1 that banks lend to small and medium-sized businesses in 2014, they will be allowed to draw £5 from the scheme.

In addition, to encourage the banks to lend even sooner, for every £1 of lending in 2013 banks will be able to draw £10 of borrowing at the reduced rates in 2014.

Leasing and factoring will also be included in the new extension.

George Osborne, the Chancellor of the Exchequer said:

“This is a big boost for the small and medium sized businesses that are at the heart of the British economy. The Funding for Lending Scheme has already reduced the costs of household mortgages and loans for businesses. This innovative extension will now do even more for small and medium sized businesses so that they can play their full part in creating new jobs.”

Sir Mervyn King, the Governor of the Bank of England added:

“The FLS has contributed to a sharp fall in bank funding costs and an improvement in credit conditions since the middle of last year. The changes announced today build on that success by broadening the scope of the scheme and ensuring that it will continue to support the supply of credit, especially to small companies, into 2015. I believe such an extension is valuable as it gives banks continued assurance against the risk that market funding rates increase. Today’s announcement is, however, a complement to, not a substitute for, ensuring that our banks are adequately capitalised.”

Alex Jackman, Head of Policy at the Forum of Private Business, said:

“While Funding for Lending may have worked to boost mortgage markets, to date it’s not worked as well for small businesses. Anecdotal evidence suggests smaller firms and start-ups are the ones really struggling to source affordable credit so a heavier incentive to finance those businesses is welcome.”

Jackman added:

“Ultimately, we need to see the FLS getting more cash to those businesses who need it most. But these schemes must be simple to use for finance providers and their availability to small businesses must be well communicated for it to be a success.”

The full benefits of the Funding for Lending Scheme remain to be seen.

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