Effect of Buffer Capital Provision on the Relationship between Loan Portfolio Quality and Financial Performance of Commercial Banks in Kenya

Abstract

This study examined the moderating role of buffer capital provision on the relationship between loan portfolio quality and financial performance of commercial banks in Kenya. Using an explanatory longitudinal design and a census of all 45 commercial banks over the period 2018–2022, the study employs panel-based hierarchical regression to test how delinquency rate, leverage ratio, and portfolio-at-risk influence return on assets (RoA), and how buffer capital moderates those effects. Corrected bivariate and multivariate analyses consistently show that higher delinquency rates, greater leverage and larger portfolio-at-risk are associated with lower RoA (delinquency: β = -0.2346, p = 0.005; leverage: β = -0.1235, p = 0.035; portfolio-at-risk: β = -0.3457, p = 0.001). Buffer capital has a positive direct effect on RoA (β = 0.4568, p < 0.001) and significantly attenuates the negative effects of delinquency, leverage, and portfolio risk (interaction βs = 0.0457, 0.0346, 0.0568 respectively; all p < 0.01). The results indicate that adequate buffer capital improves resilience and helps banks sustain profitability in the face of credit quality deterioration and high leverage. The study recommends strengthened credit risk management, balanced leverage policies, and proactive capital-buffer strategies, and calls for future research to integrate macroeconomic controls and robustness checks.