The £200m pledged to the Big Society Bank by the UK's high street banks as part of Project Merlin will be provided on a normal commercial lending basis, meaning the banks will earn a profit on it.

The terms of the pledge are outlined in a document from the Treasury - the relevant part is in paragraph 4.7 on page 5.

Prime Minister David Cameron announced the banks' funding commitment in Parliament yesterday, along with promises to increase their lending from £179bn to £190bn to businesses this year, with almost all of this increase (£10bn) to be made available to small and medium enterprises.

The news has been warmly welcomed by the sector, with NCVO, Acevo, CFDG and Social Investment Business all expressing support.

But Toby Blume, chief executive of community charity Urban Forum, has criticised the banking sector for making a profit on the Big Society Bank money.

Blume argues that the funding is “no grand gesture”, noting that as the funding is over a two-year period on a commercial basis, it is no different to banks' normal lending to the charity and social enterprise sector:

“The £200m is being lent on a commercial basis. So banks will make a profit,” he told Civil Society. “Why is this news? How does it differ to their normal lending to the voluntary sector? It is merely a bolt on their commitment to make finance available to SMEs.”

Blume said if the banks truly “understood the public need”, they would lend on an interest-free basis.

“On their own the figure pledged look quite good,” he said, “but it’s less than 1 per cent of the profit which banks make.”

John Low, chief executive of the Charities Aid Foundation, said more needed to be done to explain how £200m of wholesale finance on a commercial basis would help the voluntary sector:

"“Social investment is set to play an increasingly important role as part of a diverse funding landscape for the voluntary sector, but it is a very new market and it is still being developed," he said. "It is unclear whether the financial needs of many civil society organisations will be met through social investment on purely commercial terms.  It is important not to raise false expectations and present the Big Society Bank as a financial panacea for the charity sector.  Loans must be repaid!”

The £200m funding for the Big Society Bank is in addition to between £300m and £400m of funding expected to be received from dormant accounts.