The Bank of England said the extension, which was expected to be announced in the Autumn Statement, will allow the scheme to be gradually phased out with borrowing allowances reduced over time to minimise the risk to the economy.
The FLS was launched in July 2012 to encourage banks to lend to households and SMEs. The scheme was tapered back in December 2014 to exclude lending to households to encourage lending institutions to focus on businesses.
Participants in the scheme can draw £5 of funding from the FLS pot for every £1 of net lending to SMEs.
The scheme encourages lenders to supply more credit by making more and cheaper funding available to participants if they grant more loans.
The scheme will be phased out through a series of steps. Current participants in the FLS extension will remain part of the scheme and can draw against existing unused borrowing allowances after 31 January 2016, but will not generate additional allowances from lending beyond the end of 2015.
From 1 February 2016, participants will initially retain full access to draw against their borrowing allowance.
Allowances will reduce by 25% after six months, and by the same amount every six months after that until the end of January 2018 when the scheme will close.