LOAN PORTFOLIO OPTIMIZATION OF MICROFINANCE INSTITUTIONS IN OROMIA CREDIT AND SAVING SHARE COMPANY (OCSSCo), ETHIOPIA

Abstract

The main objective of this study was to develop Linear Programming model to help OCSSCo, Burayu branch to maximize its profit by optimally allocating loan funds to prospective loan seekers. The specific objectives of this project work were to formulate, solve, analyze and interpret the results. The sensitivity analysis of the linear programming model also analyzed. Secondary data were collected from Oromia Credit and Saving Share Company, Burayu branch. It was in the form of document and recorded data. The collected data was formulated as linear programming model. Then after optimal solution of the model has been obtained by using the theory of simplex method and a computer package, Quantitative Method for Windows version 4. It was observed that if Oromia Credit and Saving Share Company, Burayu branch disburse a total of 33,077,127 Birr to loan seekers, a profit of 3,117,387 Birr will be obtained. The sensitivity analysis of the formulated linear programming problem has been carried out using the output of QM for windows. The effect of changing interest rate for a loan on optimal solution of the LP model has been analyzed. Also, the effect of changing the allocated fund for a loan or group of loans on optimal solution of the LP model has been analyzed. Ranges in which the LP parameters (interest rates, percentage allowed for a loan or group of loans) vary keeping the optimal solution unchanged have been obtained. A linear programming approach has been recommended for loan allocation problems in microfinance and other financial institutions whose interest is mainly maximizing profit. A goal programming or multi objective linear programming approach may be used for loan allocation problems by incorporating some attributes for loans with low or no interest in to objectives. This is left for future research.