Portfolio optimization of bank credits with interval returns: Empirical evidence from Iran

Abstract

Bank credit is one of the main sources of spending on productivity and economic services. However, because of the limitations in its amount, accurate planning is essential to optimize its allocation to applicants. Despite the total volume of credits allocated to the agricultural sector, as well as the large number of applicants and sub-sectors applying for these facilities, there is still no clear pattern for the optimal allocation of agricultural bank credits in Iran. It is bank managers who must decide on the distribution of financial capital in a competitive environment. Based on this fact, the paper investigates the optimum portfolio composition of the Agricultural Bank credits in accordance with optimistic, pessimistic, and collaborative strategies by using an interval non-linear multi-objective programming model and considering three different states in determining the rate of return using a genetic algorithm. The results showed that the current pattern of the distribution of bank credits is estimated as different from the optimal one. In the optimum patterns estimated in all states, the agriculture, agricultural services, animal husbandry, aviculture and greenhouses sections were assigned the largest shares in their optimum portfolio combination. Managers can choose their desired model according to three studied strategies and depending on the importance, different estimates of return, and risk of each of them.