The Scottish Business Development Bank (SBDB), part of a package of measures unveiled in the Scottish Government's banking strategy in May 2013 and reaffirmed in last September's draft budget announcement, will not now go ahead.
The Scottish Government pointed to Scotland's constitutional lack of borrowing powers as the cause for the U-turn, but was unable to reconcile that explanation with an earlier pledge that the strategy which includes the SBDB "would apply … regardless of Scotland's constitutional future".
In a statement to the Scottish Parliament Information Centre, the Scottish Government said: "Whilst the Scottish Government would wish to extend and widen the activities of the Scottish Investment Bank, to do so currently in a productive manner is not feasible as the necessary powers are not available, including the ability to borrow from the financial markets.
"With independence, the powers would be readily available to create and deliver a truly effective Scottish Business Development Bank."
In response to questions from this newspaper, a Scottish Government source said that the plans "have not been abandoned, and there may well be the opportunity to revisit the proposal in future".
They added: "The issue at present is that we are constrained by current UK government rules covering public-sector resource accounting and departmental expenditure limits."
The claim that the funds for the bank would have to be sourced from capital markets appears to contradict the prospectus laid out in the Scottish Government paper Sustainable Responsible Banking, which suggests that the SBDB would predominantly draw down European funds.
The document said: "[The SBDB] would source resources to support its activities, potentially utilising existing SIB investments, funding available from Europe specifically the European Regional Development Fund, but also accessing new opportunities through European funding streams, including exploring the opportunity to channel resources from the European Investment Fund into Scottish SMEs."
A spokesman declined to say why the Scottish Government had shifted from its position that independence was irrelevant to the project. He said instead: "A possible, more radical, policy initiative post-independence could be the creation of an active business bank that could borrow directly from the market and pass on the benefits to Scottish growth businesses."
Gavin Brown MSP, finance spokesman for the Scottish Conservatives, who instigated the Scottish Parliament Information Centre inquiry, said: "The Scottish Business Development Bank proposal was announced with fanfare a year ago and was re-announced in September. It is disappointing that the idea has now been quietly shelved.
"I think the business community deserves a candid explanation for the decision. In particular, what has changed in the last 12 months that means it is no longer a great idea. I feel the reasoning being given so far has been weak."
Colin Borland of the Federation of Small Businesses in Scotland, said: "When plans to examine the case for a Scottish Business Development Bank were unveiled last year, they certainly seemed worth pursuing.
"That said, we were concerned that it bore all the hallmarks of another bid to support the pet projects of the enterprise establishment, rather than get the necessary funds where they are most needed - the business base."
The Sustainable Responsible Banking strategy, released five years after the near collapse of Royal Bank of Scotland and HBOS, saw the Scottish Government acknowledging that "the [financial] sector's reputation was tarnished and trust undermined".
Exemplars of better practice in the strategy included Netherlands-based Triodos Bank and Sweden's Handelsbanken - and the UK's Co-operative Bank, subject of a scathing review published last month citing poor management, bad lending and an over-ambitious drive for growth.
In its document, released a month before the Co-operative's troubles became publicly known, the Scottish Government praised the bank for actively facilitating lending to projects within the renewable energy and carbon reduction sectors.