According to the government, the move will ensure the scheme is phased out gradually, minimising risks to the economic recovery from the withdrawal of funding support.
The scheme has contributed to a substantial fall in bank funding costs since its launch in 2012, according to a government statement.
It also announced that in order to help new entrants enter the market, the Prudential Regulation Authority and the Financial Conduct Authority will launch a New Bank Start-up Unit on 20 January 2016.
This will have a dedicated website, and will help new banks through the early days of authorisation.
The government also confirmed that in response to a request from challenger banks, HM Treasury has set up a new High Level Advisory Group that will regularly provide views on banking competition.
The first meeting will be on 16 December.
Chancellor George Osborne commented that the government has been consistently clear that it wants to see a more vibrant and competitive banking sector with new banks and more innovation, benefiting working people and businesses.
He said: “From putting competition at the heart of the regulatory system to significantly reducing barriers to new banks entering the market, we are making sure that Britain has a level playing field.”
Andrew Tyrie, chairman of the Treasury Committee, added that the Funding for Lending Scheme was always an exceptional measure, adding that the Treasury is right to extend the scheme.
“In the meantime, everything reasonable needs to be done to encourage greater competition in retail and SME banking.
“Most lenders are not capable of challenging the major banks. In that respect, the Bank of England’s offer of greater access to the scheme for challenger banks is welcome.”