BANK FUNDS AND COST OF FUND
Bank funds are cash owned by banks and current assets controlled by banks and can be cashed out at any time.an amount of cash or other assets owned and controlled by the bank and can be converted into cash at any time. Regardless of the method used in determining the cost of funds, the thing that needs to be understood in determining the cost of funds is the concept of the lending rate (LR). The Lending Rate can be formulated as the selling price of the loan which includes all costs incurred by the bank including to cover risks and provide a certain level of profit.
COST OF FUND CALCULATION METHOD
Weighted Average Cost of Funds Method
The calculation of the cost of funds according to the weighted average method is to calculate the cost of funds where first the role of each type/source of funds and also take into account the minimum mandatory liquidity that affects the amount of the cost of funds. The amount of the minimum mandatory liquidity reserve must be taken from the actual (effective) figure in accordance with the daily needs of the bank. Thus, this method shows a more real cost of funds and directly shows the cost of funds, namely the cost of funds that must be paid by the bank for the amount of funds it collects after deducting the amount of funds that must be maintained as a mandatory reserve or minimum mandatory liquidity (reserve requirement).
Historical Average Cost of Funds Bank Method
The historical average cost of funds method is the simplest and easiest way to calculate the cost of bank funds, namely by raising funds divided by the total funds raised by the bank concerned in the same year/time. However, the weakness of this method is that the results obtained do not describe the current cost of funds figures/values but only describe the costs of funds that have been spent in the past. Thus this method will be accurate and valid if the interest rate of the funds is stable, neither rising nor falling. If interest rates fluctuate, then the COF figure based on this method cannot be used as a guide for management to determine the next lending rate. Thus, this method is more useful for evaluating the interest rate and total cost of funds in the past year, to be used as an estimate/ancer-ancer in the following years (future years). The way to calculate the historical average cost of funds is to multiply the interest rate by the amount of funds each type of fund collected in the past (last year).
Basically this method can be defined as the costs that must be incurred to add new funds in the portfolio of existing sources/types. This method is the opposite of the historical cost of funds method. The marginal cost of funds method or often called the incremental cost of funds method, the bank calculates and determines the cost of funds based on cost factors, meaning that the determination is calculated on the basis of the costs incurred to obtain a number of funds according to the prevailing market interest rate plus a certain percentage for the mark. -up. This method is usually used to meet the demand for credit needs and certain customers are usually prime/preference customers whose numbers are quite large, so the source of funds must be sought in the money market or issue certificates of deposit or other debt securities.