Multi objective optimization of commercial bank's balance sheet in Kenya : goal programming approach

Abstract

This study applies goal programming approach to optimizing the balance sheet of three commercial banks representing the different tiers in Kenya; Barclays Bank of Kenya (Tier 1 ), Family Bank (Tier 2), Sidian Bank (Tier 3) subject to particular constraints. The constraints used in this study include capital regulatory measures issued by the Central Bank of Kenya under the Prudential Guidelines 2013. Following the Lexicographic Model Approach of allocating priorities to different constraints, the study establishes that optimization of the balance sheet of a commercial bank is possible based on desired goals and constraints. In this optimization study, the core capital ratio was realized to be the most significant constraint when optimizing the balance sheet for a commercial bank. Once an optimum core capital ratio is attained, the other constraint, total capital ratio, can be retained at the regulatory level or slightly above it. With the same results seen across all the three banks, the same procedure can be applied for the other banks. However, caution should be taken for the smaller banks in handling their capital levels.