By Marcus Leach

The Bank of England have announced, as many analysts expected, that the Funding for Lending (FLS) scheme will be extended.

The scheme, which lends to small businesses and households was due to end in January 2014, but will now 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.

“Funding for Lending is already making a difference in the housing market and there are signs that it is starting to lower the cost of finance for businesses," Matthew Fell, CBI Director for Competitive Markets, said.

“The additional incentives for banks should accelerate activity in the small business financing market.

“But we need to be realistic - Funding for Lending is only one piece of the finance jigsaw. Boosting firms’ confidence by raising awareness of the various funding schemes available is critical.”

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.

“Today’s announcement to focus on expanding lending to SMEs is the right call. Strengthening incentives for banks to lend to SMEs and other finance providers marks a step forward in addressing the problems faced by smaller firms in accessing credit on the right terms. Giving FLS a longer shelf life is also a helpful move," Terry Scuoler, Chief Executive of EEF, the manufacturers’ organisation, said.

“But there is still more to do. In particular, there must be greater transparency in reporting the impact of FLS on lending to SMEs. In addition, government must lead a more concerted effort to promote FLS to businesses, many of whom have been disengaged from banks.”

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