Optimal Allocation of Funds for Loans Using Karmarkar’s Algorithm: Capital Rural Bank, Sunyani-Ghana

Abstract

In Ghana, the banking industry is now characterised by increasing competition and innovation. This has made most of the banks to adopt a scientific approach to improve the quality of their loan structure. The decline of relevant portfolio planning models especially in Ghana is attributed mainly to the evolving dynamics of the Ghanaian banking industry where the regulatory controls have changed with a high frequency. Due to the model used in allocating funds to various loan types, a lot of banks had suffered substantial losses from some bad loans in their portfolio. As a result, most banks are not able to maximize their profit on loans due to poor allocation of funds. The purpose of this study is to develop a linear programming model using the Karmarkar's projective scaling algorithm to help Capital Rural Bank Limited to maximise their profit on loans. The results from the model showed that Capital Rural Bank Limited would be making annual loan turn-over of GH¢5,961,300.00 which is 61.3% more than the established previously. From the study, it was further realised that policy directions mostly influence the optimal solution and not probability of bad debt.