Will funding for lending help the economy?

In July 2012, the Bank of England launched a new scheme designed to increase the amount of lending given by banks to small and medium businesses. These organisations are crucial, seen as the sector of the economy that can bring strong growth and help to restructure focus away from the financial sector. This programme provides funding to institutions below market rates for up to four years, in order to increase the amount of credit and lower interest rates. The quantity and price available to the banks depends on the lending that they carry out. As with any policy, this can be evaluated to see if the policy is likely to be considered a success, or more likely to be a failure. 

Funding for Lending has a fantastic objective, with current lending to small and medium enterprises very low. They have problems acquiring the funding they need to grow their businesses, so this scheme could help with that. These businesses are seen as the growth machine of the economy, with small businesses providing a lot of the job growth, helping to deal with unemployment. At the same time, this will help to achieve economic growth and increased exports, moving the economy away from its dangerous reliance on the financial sector and becoming more sustainable. Since many small businesses state that funding is their main problem, this scheme is very well designed to tackle that.

Furthermore, the scheme is very easy to maintain and for banks to join. Previously, other schemes, such as government grants and local council schemes have been designed to provide funding for businesses. However, these were difficult to access and little information was available, meaning that they weren’t widely used. This time, the scheme compliments current traditional systems, with banks the main source of funding, thus much more likely to succeed.

However, the policy also has numerous disadvantages. First, the policy, by hopefully increasing lending, will represent another increase in credit and debt, which helped to contribute to the current crisis. Although this is focussed on businesses, the UK as a whole currently has high debt levels and actually needs to increase saving, not debt. Despite this, if it actually leads to more investment this should benefit the economy long term and if invested properly, would bring good returns that can then be saved or reinvested at a later date.

Additionally, early results have indicated that many banks, even those who take part in the scheme, are either decreasing or keeping their lending levels constant, showing that the policy is not achieving its main goal. For example, although Barclays are lending more, banks such as Lloyds are decreasing lending, which meant that loans to businesses fell by around £3 billion in the final quarter of 2012. This is likely because many other factors contribute to a banks decision to lend, including confidence likely being a major factor. At the moment, the economy is weak, therefore banks are unlikely to want to lend, thus don’t lend even considering the scheme. To tackle this, Osborne is extending the scheme, with banks now able to access £10 worth of funding for each £1 of additional net lending, increasing the incentives and hopefully benefitting the economy.

Banks are also being told to cut lending in order to boost their balance sheets and capital, in order to meet new requirements, creating conflicting objectives. These capital requirements are part of the law, thus they will realise that they have to meet these, turning down the optional ability to lend more. On the other hand, there are time lags involved, as it takes time to process and approve the loans, meaning that we could see additional lending in the coming months.

Overall, the scheme has a fantastic goal, helping small and medium businesses to access funding which should help them grow. It should also help increase investment, which the UK is lacking, helping the economy long term, while bringing economic growth and additional jobs in the short term, at a time when both are needed. However, the scheme does have problems, increasing credit again while early results have indicated that it hasn’t been a success, as lending fell. However, the scheme could have stopped further falls, and thus further problems, while the Bank of England have suggested that time lags are a major factor, as it takes a long time to process a loan. This means that although it’s not currently seen as a success, the extension of the scheme could mean that the scheme will eventually work.