Home
Back
Cost of Funds Formula:
| From: | To: |
Cost of Funds (COF) is a financial metric used by banks and financial institutions to measure the interest expense paid to acquire funds relative to the average funds available. It represents the percentage cost of the money that banks use for lending and investment activities.
The calculator uses the Cost of Funds formula:
Where:
Example: If a bank pays BDT 100 crore in interest on average funds of BDT 1,000 crore, the COF would be 10%.
Details: COF is crucial for banks to determine their lending rates, assess profitability, and make strategic financial decisions. Bangladesh Bank monitors COF as part of its regulatory oversight to ensure financial stability in the banking sector.
Tips: Enter the total interest expense in BDT and the average funds in BDT. Both values must be positive numbers, with average funds greater than zero.
Q1: What is considered a good COF for banks?
A: A lower COF is generally better as it indicates the bank is acquiring funds at a lower cost. The ideal COF varies by market conditions and bank type, but typically ranges between 3-8% for well-managed banks.
Q2: How does COF affect lending rates?
A: COF directly influences lending rates. Banks add their operating costs, risk premium, and profit margin to COF to determine the final lending rates to customers.
Q3: What factors influence COF?
A: COF is influenced by central bank policy rates, market competition, deposit mix, economic conditions, and the bank's credit rating.
Q4: How often should COF be calculated?
A: Banks typically calculate COF monthly or quarterly for internal management and regulatory reporting to Bangladesh Bank.
Q5: What's the difference between COF and cost of deposits?
A: COF includes all interest-bearing liabilities, while cost of deposits only considers deposit-related expenses. COF provides a broader view of funding costs.