The Bank of England (BoE) has confirmed that it is to extend its funding scheme to small and medium sized businesses, as banks still show reluctance to provide loans for SMEs.
Funding for SMEs
Launched by the Treasury and the BoE in 2012, the initiative has given over £60 billion worth of low-cost funding to banks in order to support loans for small businesses.
The overall mission plan for FLS changed in 2014, with SMEs becoming the main recipient of the scheme. In exchange for collateral, small business owners would be able to gain extra cash to help improve the state of their company.
During 2014 FLS suffered a severe decline in activity, with net lending decreasing by over £800m during the final economic quarter.
In total, FLS suffered a £2bn decline in 2014, prompting calls for the scheme to be scrapped. The Labour party hit out at the scheme in response to George Osborne extending the project to at least January 2016.
Labelling the scheme ‘deeply disappointing’, shadow financial secretary Cathy Jamieson insisted that ‘Labour’s better plan will establish a proper British investment bank and ensure we have more competition in our banking sector so that SMEs get the funding they need to expand and create more good jobs.’
‘Provided an important source of funding support’
Since then however, FLS has picked up considerably, with a joint statement from the BoE and the Treasury stating that since 2015, SME lending volumes have increased by £2.1 billion.
‘Since its launch in 2012, the FLS has provided an important source of funding support to banks, which has flowed through to improved credit conditions across the economy,’ said Mark Carney, governor of the Bank of England.
‘As conditions have normalised for particular sectors over the life of the FLS, we have consistently reduced the scope of this temporary scheme and focussed support where it is needed most,’ continued Carney.
The BoE also confirmed that this will be the last time that the scheme receives an extension, as its set to be wound down by 2018. From February 2016, allowances will reduce by 25 per cent after six months and by the same amount every six months thereafter until January 2018.
How has the announcement been received?
The extension has been welcomed by the Federation of Small Businesses (FSB), with national chairman John Allan emphasising the positive impact the scheme has had on smaller lenders.
‘FSB has been calling on Ministers and the Bank of England to carefully consider the future of the Funding for Lending scheme and we welcome this two-year extension,’ said Allan.
‘Providing smaller lenders and newer entrants to the market with greater access to the scheme is a sensible move. It should help them compete with the bigger banks and over time, provide businesses with a wider range of finance options,’ continued the chairman.
Paul Lynam, chief executive of Secure Trust bank echoed Allan’s sentiment towards the announcement, stating that the extension is evidence of ‘a tangible willingness by government to work with the challengers.’
‘All we seek is a level playing field, so it’s good to see recognition that one does not currently exist,’ continued Lynam. However not everyone believes that the extension is a good idea. Rhydian Lewis, chief executive and co-founder of peer-to-peer lender RateSetter, believes that the top-down initiative is restricting competition within the lending industry.
‘The longer the FLS tap is left on, the greater the risk of artificially depressing the price of finance for FLS participants, squeezing out competitors that offer open-market, commercial rates,’ said Lewis.