ABSTRACT

In this study we present results of optimization of loan portfolio management of banks. An Operational Research technique, Goal programming, is applied to the management of loan portfolio in banks in order to optimize it. With the result obtained, using a multi objective approach, provides an answer on how to handle cases of bad loans or doubtful loans. Bad loan is a major factor militating against optimization of bank goals, and it is one of the major causes of bank failure.

CHAPTER ONE

INTRODUCTION

1.1       BACKGROUND OF THE STUDY

The success of any bank in this very competitive lending environment depends largely on the way and manner the loan portfolio of the banks is being managed. An effective way of evaluating bank’s credit policies for loan portfolio is through the Goal programming approach [2,3,6]. Goal programming is an extension of linear programming in which management objectives are treated as goals to be attained as closely as possible within the practical constraints of the problem. Various areas in the lending process where Goal programming is usually applied include; prospect identification and qualification, sales and customer service, loan approval and review, loan booking and servicing, portfolio monitoring, loan scrutinizing, loan workout, and training [4,6,8]. Most of these problems are always with multiple objectives and criteria. These are referred to as multiple criteria optimization problems. Goal programming technique is usually applied to these multiple criteria optimization problems. It provides a pragmatic and flexible way to cater for such problems [1, 2]. It is perhaps the most well-known method of solving multi objective optimization problems [2]. A set of goals that should be obtained for the objective functions is constructed. The goals are assigned weighing factors to rank them in order of importance. A single objective function is written as the minimization of the deviations from the stated goals. The goal programming model can be written as follows: Minimize Z = d1 + + d1 - + d2 - + d3 - , subject to some constraints, where di - and di + measure the amount by which the target is under achieved and over achieved respectively [3].

Banks being a financial institution, is engaged in the acceptance of deposit of money, granting of credit (by means of loan, overdraft) and other transactions such as the discount of bills, foreign exchange etc.

 Loans being one of the transactions being done in the bank are a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower. The borrower initially does receive an amount of money from the lender, which he has to pay back, usually but not always in regular installments to the lender. This service is generally provided at a cost referred to as interest on the debt. A loan is of the annuity type if the amount paid periodically (for paying off and interest together) is fixed.

Since computer in business has risen above the detailed clerical automation, to providing decision-making assistance at a highest level of management. The ability of computer to store, retrieve and analyze data at tremendous speed at low cost has made it imperative for large corporation and industry to depend on its accuracy and efficiency in its operation, with the environment at fast pace, viewing this development as an opportunity to increase their influence and control the data processing of the organization. Business carried out in some organization is now totally dependent on the accurate operations of computers. The banking industry is no exception to the capabilities the computer provides especially in the area of loan and advances, which in no small measures contribute to the financing of individuals and business and to enhance economic development.

Loan service for small organizations individuals was initiated after a number of considerations on the banking system.  Major Banks are mainly guided by financial profit for their shareholders.  They are after minimization of financial risks.  Such strategies don’t leave much room to people on low income or even small organizations that strive for their survival.

This research studied the computer-based loan scheme management system-as was done in Unical Micro-Finance Bank Ltd.  Loans are readily given to people who have an account (mostly current Account) in the Unical Micro-Finance Bank.  Apart from being a customer to the necessary for giving him loan.  Such conditions may include: provision of collateral security, having at lest one guarantor and filling the bank loan management form.  The collateral security must be a landed property before the bank will accept it.  Also, the guarantor must have an account in that bank and must be a reportable person in the society.The role of computer in loan scheme management can never be overemphasized.  The computerized bank loan management form enables bankers to work without stress. 

A bank can be defined as a financial institution that engages in acceptance of deposit of money, granting of credits (loans, overdraft, etc) and other transaction such as discounting of bills, foreign exchange etc. one of the basic functions of a bank is to issue out loans to competing users. There are two types of loans that are being issued out to customers; they are secured loans and unsecured loans.

•          Secured loans-: are loans backed by a pledge of some specific valuable items, known as collateral, which can be seized by the lender should the borrower fail to repay the loan.

•          Unsecured loans:-are loans that require no collateral, or security. In this type of loan, the bank relies on the general credit record and the earning power of the borrower. To increase their returns on such loans, as well as to obtain some protection in case of default most banks insist that the borrower maintain some minimum amount of money at the bank while the loan is outstanding. Such a deposit is called a compensating balance, meaning that while a borrower pays interest on the full amount of a loan, a substantial portion of that loan is kept on deposit in the bank.

1.2       STATEMENT OF THE PROBLEM

The existing loan scheme management system of unical micro finance bank has the following draw backs:-

1. Time wasting in granting of loan to customers.
2. Customers Information’s are kept on Ledgers which may be eaten up by insects.
3. Improper calculation of monthly interest on loan account.

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