The FLS scheme, now only offering loans to businesses including SMEs (having wound up funding for mortgages) continues to court controversy.

The most recent figures from the Bank of England show lending to businesses from all banks and building societies actually increased in the second quarter of the year. However, lending from banks participating in the FLS declined for the second time this year.

The key figure is £435m. This is the reduction in net lending to SMEs by the FLS. And the issue doesn’t seem to just involve SMEs: Over the same period, lending to all businesses by the FLS reduced by more than £3bn.  The FLS doesn’t appear to be working as intended.

The FLS does not of course lend directly. Rather it’s intended to help banks lend at reasonable rates, mainly to SMEs. SME’s are traditionally not well served by banks. But, paradoxically, are regarded as engines of economic growth. Without funds to expand small businesses can’t create jobs.

Not surprisingly, business leaders have expressed disappointment in the scheme’s ability to channel funds to small businesses.

Banks can borrow from the FLS until January 2015. Of course such initiatives take time to make an impact but the trend in lending isn’t encouraging to those that champion small businesses.  It’s also true to say, to be balanced, no one knows what lending would have been like without the scheme.

The problem with the FLS is probably in part due to the Bank of England’s intention to ensure UK banks have sufficient capital. After the FLS started, the Bank of England said banks must raise more capital and various capital raising initiatives have been completed. Perhaps then banks are now constrained by other policies.

All this begs the question of exactly what is the best way to channel funds to SMEs. Business leaders continue to press the point saying the need to fill the funding gap is very real