The case for further extension of the Funding for Lending Scheme

The Funding for Lending Scheme
The Funding for Lending Scheme

Given the country’s vote to leave the referendum and the possibility of a recession, it is time for a re-think of the Funding for Lending Scheme, says Oaknorth bank CEO Rishi Khosla.

The Funding for Lending Scheme is designed to incentivise banks and building societies to boost their lending to the UK real economy by providing funding for an extended period, with both the price and quantity of funding provided linked to their lending performance.

When asked in a recent interview what sort of incentives he would like to see the government introducing to combat this, Khosla argued the case for extending the FLS, which is only going to run until January 2018.

The scheme has seen a great deal of success which led to it being extended back in November of last year with a renewed focus on SMEs.

Commenting on the changes to the scheme, George Osborne, Chancellor of the Exchequer at the time, said: “The Funding for Lending Scheme, which we launched with the Bank of England in 2012, has been a vital part of supporting the recovery, ensuring lending to households and businesses…

“Given the improvement we’ve seen in credit conditions for households and large businesses, as our long-term economic plan moves from rescue to rebuild it is right that we continue to focus the scheme’s firepower on the small businesses that are the lifeblood of the economy. The Funding for Lending Scheme will be gradually wound down as the recovery strengthens, delivering a managed exit from the scheme.”

However, for many smaller banks, this extension will not provide much of a boost. Khosla explains that “you need a back book of collateral to actually pledge, and as a new bank you have no back book.”

Oaknorth is just about to enter the scheme, but when it qualifies it will have a relatively short window to make the most of it. A number of other recently authorised banks are in the same boat.

Given the good the scheme has achieved and the challenger banks reputation for lending to SMEs and aid recovery of the economy over the past few years, Khosla argues that “continuing to actually help institutions such as [Oaknorth] lend to the SME market really makes sense.”

An extension of the scheme to help smaller banks make the most of it is potentially one way of doing this.

The Federation of Small Businesses (FSB) agrees that the scheme is not an even playing field for all banks.

FSB policy director Martin McTague said that the organisation has “consistently supported” the scheme and “welcomed the two-year extension” but that “looking to the future, the Bank of England could now look at how to help smaller challenger banks access FLS on a more equal footing with larger banks, such as through the British Business Bank’s ENABLE guarantees.”

Hitachi Capital Business Finance MD Gavin Wraith-Carter agrees that the scheme puts smaller banks at a disadvantage, and also warns that “although a good scheme in principle, [it] cannot be accessed through all business lenders and limits the SME to using their banks as their standard route for funding.”

“Initiatives such as the recently launched Enterprise Funding Guarantee from the British Business Bank have the opportunity to reach SME’s through the full range of finance providers, giving choice and promoting the different options available to them within the market.”