Mathematical Application of Revised Simplex Modelling in Optimal Loan Portfolio

Purpose: Agricultural development banks (ADB) record marginal profits with some running at a loss. Due to poor allocation and loan disbursement, the banks are not able to optimize profits from loans. The main aim of this study is to develop a Linear Programming (LP) model to help the Agriculture Development Bank, Sunyani branch in the Brong Ahafo Region to allocate their funds to prospective loan seekers in order to maximize profits.

Methodology: To achieve this aim, secondary data was extracted from the annual reports and financial statements of the bank. Based on these empirical data, the LP model was formulated. The results were found after nine iterations. A computerized software application called LP Solver based on the Revised Simplex Algorithm was used to solve the problem.

Results: The results from the model showed that ADB, Sunyani branch would be making an annual profit of GH¢ 476732.00 on loans alone as against GH¢ 190693.00 in 2011 if they stick to the model. The policymakers and the loan officers at Sunyani ADB should allocate more funds to personal loans since they contributed 34.79% significantly to the bank’s profit.

Unique Contribution to Theory, Practice and Policy: From the study, it was realized that the Scientific method used to develop the proposed model can have a significant increase in the Bank’s profit margin if put into use. Banks and other financial institutions should adopt the use of mathematical tools and methods to improve efficiency in their work.