UK Expands Central Bank Lending Scheme to Boost Economy

The Bank of England
Getty Images
The Bank of England

Britain reworked its Funding for Lending Scheme (FLS) on Wednesday in the hope of getting more credit flowing to small and medium-sized firms and injecting life into the country's flatlining economy.

The Bank of England and the Treasury said incentives to boost lending would be heavily skewed towards smaller firms and that the period during which banks can get funding from the FLS would run for an additional year, until the end of January 2015.

Banks will be able to lend to alternative providers of credit such as leasing and factoring firms, which help small companies raise funding, as well as mortgage and housing credit corporations, the statement said.

(Read More: Sterling: the Currency That's Most Like Rocky?)

"I believe such an extension is valuable as it gives banks continued assurance against the risk that market funding rates increase," said Bank of England Governor Mervyn King.

"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," Britain's finance minister George Osborne said in a joint statement with King.

(Read More: Bank of England Holds Fire Despite New Remit)

The original FLS was launched last August and offers banks cheap credit if they increase lending to households and businesses. Results have been mixed, with benefits so far mainly going to banks and homebuyers rather than small businesses.

Under the changes announced on Wednesday, every pound of additional lending by banks to small and medium-sized firms in the remainder of 2013 increases the amount of funding that banks will be able to draw upon by 10 pounds.

In 2014, that falls to five pounds of FLS funding for banks for every pound they lend to SMEs, the Bank of England and the Treasury said.