Estimating the Bank’s Cost of Funds

Common Sources of Funds

• Funds sourced through deposits

• Funds sourced through borrowings

• Funds sourced from both deposits and borrowings

Fund sourced solely from Deposits

If funds come solely from deposits …

Account Ave. Deposit Balance

(A)

% of Total Deposit

(B)

Deposit Interest

Rate

(C)

Weighted Cost of funds

(D = B x C)

Reserve Requirement

(E)

Cost of Funds

(D / 1-E)

Savings 6,000,000 60% 4% 2.4% 2% 2.45%

Time 3,000,000 30% 10% 3.0% 2% 3.06%

Demand 1,000,000 10% 0% 0.0% 7% 0.00%

TOTAL 10,000,000 100% 5.4% 5.51%

Computing the Average Deposit Balance

• Data required:– Average of Total Daily BalancesTotal Daily Balances– Average Monthly BalancesMonthly Balances

Average of Total Average of Total DailyDaily Balances Balances

Day End of Day Balance

Savings Time Demand TOTAL

1 5,000,000 2,500,000 500,000 8,000,000

2 6,000,000 3,000,000 1,100,000 10,100,000

3 6,500,000 2,000,000 1,000,000 9,500,000

4 7,000,000 4,000,000 800,000 11,800,000

5 6,000,000 2,000,000 300,000 8,300,000

6 - 30 150,500,000 75,000,000 28,600,000 254,100,000

TOTAL 181,000,000 88,500,000 32,300,000 301,800,000

Average 6,033,333 2,950,000 1,076,667 10,060,000

Average Monthly Balance

Month End of Month Balance

Savings Time Demand TOTAL

1 5,000,000 2,500,000 500,000 8,000,000

2 6,000,000 3,000,000 1,100,000 10,100,000

3 6,500,000 2,000,000 1,000,000 9,500,000

4 7,000,000 4,000,000 800,000 11,800,000

5 6,000,000 2,000,000 1,300,000 9,300,000

6 - 12 41,500,000 22,500,000 7,300,000 71,300,000

TOTAL 72,000,000 36,000,000 12,000,000 120,000,000

Average 6,000,000 3,000,000 1,000,000 10,000,000

Computing the Interest Expense on Deposit

Microfinance Loan Portfolio, previous month (A)

650,000

Microfinance Loan Portfolio, current month (B)

900,000

Average Loan Portfolio (C) = (A+B/2) 775,000

Interest on Deposits, per annum (D) 5.51%

Interest on Deposits, per month (E)=(D/12) 0.4591%

Interest Expense on Deposits, current month (C x E)

3,558

Funds sourced solely from Borrowings

If funds come solely from borrowings …

Source of Borrowed

Funds

Average Amount

Outstanding (A)

% of Total Borrowings

(B)

Interest Rate

(C )

Weighted Cost of

Borrowings (B x C)

PCFC 200,000 57.14% 13.00% 7.43%

BSP 100,000 28.57% 9.00% 2.57%

LBP 50,000 14.29% 12.00% 1.71%

Total 350,000 100.00%   11.71%

Computing the Average Amount Outstanding

Source of Borrowed

Funds

Previous Month Balance

(A)

Current Month Balance

(B)

Average Amount Outstanding ((A + B) / 2)

PCFC 300,000 100,000 200,000

BSP 150,000 50,000 100,000

LBP 75,000 25,000 50,000

Total 525,000 175,000 350,000

Computing the Interest Expense on Borrowed Funds

Microfinance Loan Portfolio, Previous Month (A) 650,000

Microfinance Loan Portfolio, Current Month (B) 900,000

Average Loan Portfolio (C ) = (A + B/2) 775,000

Interest on Borrowed Funds, per annum (D) 11.71%

Interest on Borrowed Funds, per month (E) = (D/12) 0.98%

Interest Expense on Borrowed Funds, current month (C x E) 7,563

Funds sourced from both Deposits and Borrowings

If funds sourced from deposits and borrowings …

Account Ave. Monthly

Balance (A)

% of Total Funds (B)

Interest Rate

(C )

Weighted Cost of Funds

(D=B x C)

Reserve Requirement

(E)

Cost of Funds (D/1-E)

DepositsSavings 6,000,000 46.15% 4.0% 1.85% 2% 1.89%

Time 3,000,000 23.08% 10.0% 2.31% 2% 2.36%

Demand 1,000,000 7.69% 0.00% 0.00% 7% 0.00%

LoansPCFC 1,000,000 7.69% 13.0% 1.00% 1.00%

BSP 1,000,000 7.69% 9.0% 0.69% 0.69%

LBP 1,000,000 7.69% 12.0% 0.92% 0.92%

TOTAL 13,000,000 100.00% 6.86%

Computing the Interest Expense on Deposits and Borrowed Funds

Microfinance Loan Portfolio, Previous Month (A) 650,000

Microfinance Loan Portfolio, Current Month (B) 900,000

Average Loan Portfolio (C ) = (A + B/2) 775,000

Interest on Deposits and Borrowed Funds, per annum (D) 6.86%

Interest on Deposits and Borrowed Funds, per month (E) = (D/12) 0.572%

Interest Expense on Deposits and Borrowed Funds, current month (C x E) 4,430