Cost Of Fund Calculation Bangladesh Bank

Cost of Funds Formula:

\[ COF = \frac{\text{Interest Expense}}{\text{Avg Funds}} \times 100 \]

Cost of Funds (COF):

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1. What is Cost of Funds?

Cost of Funds (COF) is a key financial metric used by Bangladesh Bank and financial institutions to measure the interest expense paid for funds used in their operations. It represents the percentage cost of acquiring funds for lending and investment activities.

2. How Does the Calculator Work?

The calculator uses the Bangladesh Bank cost of funds formula:

\[ COF = \frac{\text{Interest Expense}}{\text{Avg Funds}} \times 100 \]

Where:

\( \text{Interest Expense} \) — Total interest paid on deposits and borrowings (BDT)
\( \text{Avg Funds} \) — Average funds employed during the period (BDT)
\( COF \) — Cost of Funds expressed as percentage (%)

Explanation: This formula calculates the effective interest rate paid for the funds used by the bank, providing insights into funding costs and profitability.

3. Importance of COF Calculation

Details: COF is crucial for Bangladesh Bank's monetary policy analysis, bank profitability assessment, interest rate setting, and financial stability monitoring. It helps in determining the spread between lending and deposit rates.

4. Using the Calculator

Tips: Enter interest expense and average funds in Bangladeshi Taka (BDT). Both values must be positive numbers. The calculator will compute the cost of funds as a percentage.

5. Frequently Asked Questions (FAQ)

Q1: What is included in interest expense?
A: Interest expense includes all interest paid on deposits, borrowings, certificates of deposit, and other interest-bearing liabilities.

Q2: How is average funds calculated?
A: Average funds are typically calculated as the average of beginning and ending total funds for the period, or as a weighted average for more precision.

Q3: What is a typical COF for Bangladeshi banks?
A: COF varies by bank type and market conditions, but typically ranges from 4% to 8% for commercial banks in Bangladesh.

Q4: Why does Bangladesh Bank monitor COF?
A: Bangladesh Bank monitors COF to assess banking sector health, inform monetary policy decisions, and ensure financial system stability.

Q5: How does COF affect bank profitability?
A: Lower COF generally indicates better profitability as it reduces the cost of funds that banks use for lending and investments.