Developing a Model for Optimal Allocation of Financial Resources to Iran's Farming Sector, Considering the Economic Sustainability of the Products

Document Type : Research Paper

Authors

1 Ph.D. Student of the Department of Agricultural Economics, Faculty of Agriculture and Natural Resources, University of Tehran, Iran

2 Professor,Department of Agricultural Economics,Faculty of Agriculture and Natural Resources, university of Tehran

3 Assistant Professor,Department of Agricultural Economics,Faculty of Agriculture and Natural Resources, university of Tehran

Abstract

The allocation of financial resources to the agricultural sector by banks is often based on the Markowitz model, in which the risk and return of an investment are taken into account at the same time. However, considering these two criteria alone in the allocation of financial resources cannot lead to the development of products with economic sustainability and compatible to the Irans’climatic conditions. In this study, a model for allocating financial resources to the agriculture sector has been developed in which the economic sustainability of products has also been considered in addition to the goals of increasing return and reducing the risk of financing the products. This model was applied to the data of the Agricultural Bank of Iran, as the main supplier of financial resources to the agricultural sector, and specified the optimal loan portfolio for this bank. The model was solved using the e-constraint method within the lexicographic approach in the form of a multi-objective mathematical programming model. Results indicate that the proposed optimal loan portfolio for the agriculture sector is much more preferred to current banks’ portfolio in terms of return, risk and economic sustainability index. Also, the developed model suggests a loan portfolio in which the largest share is given to products that are most compatible with the country's climatic conditions and provide the highest risk compensation index. Thus, the resulted loan portfolio can guarantee the benefit of the bank's shareholders, help to fulfill the banks’ development responsibilities, and support the policy maker in development of sustainable products and transferring the current cultivation patterns towards a sustainable cultivation pattern. Therefore, it is suggested that the Bank of Agriculture and the other financial providers utilize the proposed model and take into account the economic sustainability index of the products in allocating the financial resources to agricultural products.

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