The scheme has provided £60bn in low cost funding to banks to encourage lending to households and businesses since its launch in 2012.
The Bank said the withdrawing of funding support should be done gradually over the two years to minimise risks to the economic recovery.
Chancellor George Osborne 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.
“It was due to expire in January but I am pleased to say that we are extending the scheme until 2018, supporting more loans.
“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.”
Russell Gould, chief operating officer of business loan provider Everline, criticised the FLS scheme.
He said: “Today’s small business environment is fast-paced and this scheme didn’t tackle the fundamental problem of traditional lenders taking weeks or even months to make a lending decision and get funding to the businesses that need it.
“What’s needed is investment in awareness schemes so that small businesses are empowered to choose the right finance product for their specific business needs. This is the only way to ensure lending figures continue to rise and secure the future success of the country’s SMEs.”
