Application of Linear Programming for

Profit Maximization of Dream Team Bank

of Canada

Course: Statistical Method for Business Analytics (MGSC5118:10)

Submitted to Professor Patrick Delamirande
Submitted by Dream Team
Le Ho Thao Nguyen (20194224)
The major goal of our research paper is to optimize the profit for Dream Bank of Canada located
in Sydney, NS using the areas of loans such as mortgage loans, short term loans, cash loans and
advance, secured loans, and unsecured loans and finally restructuring the product portfolio. This
problem of profit optimization of Dream Bank of Canada is modeled as a linear programming
problem and the resulting LPP is then solved using solver in excel. This is done in order to
restructure the product portfolio of the bank due to the pandemic situation created by corona virus.

Description of model
The data for this study is collected by Dream Bank of Canada (DBC) located in Sydney, Nova
Scotia. Due to the current pandemic of Corona virus, the bank needs to restructure its loan product
portfolio. By lowering the interest rates, the Bank hopes to encourage more people to make a loan
in this struggling time. However, the Bank also wants to maximize the profit from interests earned
and satisfy the diversification requirements set by the Board of Director. The portfolio of DBC
involves a mix of five types of loan product including mortgage loan, short term loan, cash loan
and advance, secured loan and unsecured loan. Each type of loan bears different interest rate.
Specifically, annual interest rate of mortgage loan is 3.24%, of short-term loan is 5.4%, of Cash
loan and advance is 6.65%, of Secured loan is 7.2% and of Unsecured loan is 11.6%. The total
available fund is $5,000,000 CAD for above loan products. Below are constraints that the bank is
facing:
(a) Amount distributed to different loan products must not be more than the total available fund.
(b) Total amount distributed for Mortgage loan, Short-term loan and Cash loan and advance must
be equal or less than 60% of the total available fund.
(c) Total amount distributed for Mortgage loan must be equal or greater than 5% of the total
available fund.
(d) Total amount distributed for Short-term loan must be equal or greater than 7% of the total
available fund.
(e) Total amount distributed for Secured loan must be at least 10% and at most 35% of the total
available fund.
(f) Total amount distributed for Unsecured loan must be at least 5% and at most 15% of the total
available fund.
Table below represents the interest rates applied for each loan products.
Type of loan Interest rate
Mortgage loan 3.24%
Short term loan 5.40%
Cash loan and advance 6.65%
Secured loan 7.20%
Unsecured loan 11.60%
(Source: Official website of Dream Bank of Canada company, 2020)

Interpretation of model
The optimal profit achieved from the model for Dream Bank of Canada is $366,350 CAD. This
level of profit is achieved when allocated amount for Mortgage Loan is $250,000, for Short-term
Loan is $350,000, for Cash loan and advance is $1,900,000, for Secured Loan is $1,750,000 and
for Unsecured Loan is $750,000. The Answer Report shows details of solution as below:
Objective Cell (Max)
Cell Name Original Value Final Value
$B$6 Total Profit - 366,350

Variable Cells
Cell Name Original Value Final Value Integer
$A$3 Mortgage loan - 250,000 Contin
$B$3 Short term loan - 350,000 Contin
$C$3 Cash loan and advance - 1,900,000 Contin
$D$3 Secured loan - 1,750,000 Contin
$E$3 Unsecured loan - 750,000 Contin

Constraints
Cell Name Cell Value Formula Status Slack
$F$13 Min Unsecured Loan 750,000 $F$13>=$H$13 Not Binding 500,000
$F$14 Min Mortgage Loan 250,000 $F$14>=$H$14 Binding -
$F$15 Min Short term Loan 350,000 $F$15>=$H$15 Binding -
$F$16 Min Secured Loan 1,750,000 $F$16>=$H$16 Not Binding 1,250,000
$F$9 Total fund 5,000,000 $F$9<=$H$9 Binding 0
$F$10 Max Mortgage, Short 2,500,000 $F$10<=$H$10 Not Binding 500000
term and Cash Loan
 $F$11 Max Secured loan 1,750,000 $F$11<=$H$11 Binding 0
$F$12 Max Unsecured Loan 750,000 $F$12<=$H$12 Binding 0
Table 6-1 Answer Report - objective functions, decision variables and constraints

The Answer Report also indicates the status of each constraint. As can be seen, Min Mortgage
Loan, Min Short term Loan, Total Fund, Max Secured Loan and Max Unsecured Loan are binding
constraints. Looking at the Total Fund binding constraint, it means that allocating the suggested
amount for each type of loans will fully utilize the total available fund of $5,000,0000. Hence, if
the bank wants to make more profit, more funds should be made available through resources
redistribution and (or) fund increasing.

On the contrary, Max Mortgage, Short term and Cash Loan is not a binding constraint. Out of
$3,000,000 available to fund above type of loans, the optimal solution required Dream Bank of
Canada to allocate only $2,500,000 in total, which leaves a slack of unused of $500,000. Therefore,
adding more resources in this constraint will not help Dream Bank of Canada achieve higher profit.
It would be a waste of resource if the bank decides to allocate more money to the total fund of
those types of loans because the existing budget is not fully utilized yet.

2,500,000 without impacting the optimal profit.

Conclusion
From the above explanation, it is concluded that the maximum net return of Dream Bank of Canada
is is CAD $366,350 when allocated amount for Mortgage Loan is $250,000, for Short-term Loan
is $350,000, for Cash loan and advance is $1,900,000, for Secured Loan is $1,750,000 and for
Unsecured Loan is $750,000.

In order to increase profit, more funds for loan products should be made available either through
internal resources redistribution or fund raising from other revenue streams such as customer
deposits and earnings from investment etc. This could be prioritized because each unit of increase
in Total fund yields the highest increase in overall profit. Besides, the Bank could consider loosen
the diversification requirements for long-term loans such as secured loan and unsecured loan by
increasing the maximum amount to allocate funding into these loans because these two yield
highest interests. However, if this step is conducted, the Bank also needs to consider the trade-off
between return on investment and risk involved in the financial planning aspect.

References
Amit Kumar Jain, R. B. (2019). Application of Linear Programming for Profit Maximization of the Bank
and the Investor. Linear Programming. Retrieved from www.linearprogramming.com

Herald, T. (2020). Role of banks in the economy. Retrieved from The Herald House:
https://www.herald.co.zw/role-of-banks-in-the-economy/

Musah Sulemana, A.-R. H. (2014). Modeling the Problem of Profit Optimization of Bank X Tamale, as
Linear Programming Problem. Linear Programming. Retrieved from
http://article.sapub.org/10.5923.j.am.20140401.03.html

Asllani, A. (2014). Business Analytics with Management Science Models and Methods, Pearson
Publishers.