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

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.

Loan Portfolio Quality, Buffer Capital, Financial Performance

1. Acharya, V. V., Engle, R., & Richardson, M. (2012). Capital shortfall: A new approach to ranking and regulating systemic risks. American Economic Review, 102(3), 59–64. [Google Scholar] [Crossref]

2. Adeniji, A. A. (2020). The effec9928-9937.t of loan portfolio quality on the financial performance of commercial banks in Nigeria. International Journal of Finance and Accounting, 9(1), 12–21. [Google Scholar] [Crossref]

3. Asantey, J. O., & Tengey, S. (2014). An Empirical Study on the Impact of Credit Risk on the Financial Performance of Banks in Ghana. International Journal of Economics, Commerce and Management, 2(9), 1–15. [Google Scholar] [Crossref]

4. Asantey, J. O., & Tengey, S. (2014). An empirical study on the impact of credit risk on the financial performance of banks in Ghana. International Journal of Economics, Commerce and Management, 2(9), 1–15. [Google Scholar] [Crossref]

5. Ashcroft, A. (2017). Loan portfolio quality and performance of banks in the UK. Journal of Banking Regulation, 18(3), 256–270. [Google Scholar] [Crossref]

6. Athanasoglou, P. P., Brissimis, S. N., & Delis, M. D. (2015). Bank-specific, industry-specific and macroeconomic determinants of bank profitability. Journal of International Financial Markets, Institutions and Money, 18(2), 121–136. [Google Scholar] [Crossref]

7. Ayuso, J., Pérez, D., & Saurina, J. (2004). Are capital buffers pro-cyclical? Journal of Financial Intermediation, 13(2), 249–264. [Google Scholar] [Crossref]

8. Beltratti, A., & Stulz, R. M. (2012). The credit crisis around the globe: Why did some banks perform better? Journal of Financial Economics, 105(1), 1–17. [Google Scholar] [Crossref]

9. Berger, A. N., & Bouwman, C. H. S. (2013). How does capital affect bank performance during financial crises? Journal of Financial Economics, 109(1), 146–176. [Google Scholar] [Crossref]

10. Berger, A. N., & Di Patti, B. E. (2006). Capital structure and firm performance: A new approach to testing agency theory and an application to the banking industry. Journal of Banking & Finance, 30(4), 1065–1102. [Google Scholar] [Crossref]

11. Bikker, J. A., & Metzemakers, P. A. J. (2005). Bank provisioning behaviour and procyclicality. Journal of International Financial Markets, Institutions and Money, 15(2), 141–157. [Google Scholar] [Crossref]

12. Bobáková, I. V. (2013). Raising the profitability of commercial banks. BIATEC, 11(2), 21–25. [Google Scholar] [Crossref]

13. Brown, L., & Smith, R. (2019). Capital buffers and financial performance of commercial banks. Journal of Financial Regulation and Compliance, 27(1), 45–61. [Google Scholar] [Crossref]

14. Bruno, V., & Rauh, J. D. (2019). Regulatory capital and risk-taking: International evidence. Journal of Finance, 74(2), 383–420. [Google Scholar] [Crossref]

15. Cheng, Y. (2021). Non-performing loans and bank performance: Evidence from Asian markets. Journal of Risk and Financial Management, 14(2), 89–102. [Google Scholar] [Crossref]

16. Copisarow, R. (2010). The Application of Commercial Principles to Microcredit. Journal of Microfinance, 6(2), 63–78. [Google Scholar] [Crossref]

17. de Klerk, T. (2019). Loan quality and profitability of commercial banks in South Africa. South African Journal of Economic and Management Sciences, 22(1), 1–10. [Google Scholar] [Crossref]

18. de Klerk, T. (2019). Loan quality and profitability of commercial banks in South Africa. South African Journal of Economic and Management Sciences, 22(1), 1–10. [Google Scholar] [Crossref]

19. Elorm-Donkor, R., Kortoh, S., & Asare, E. (2015). Loan portfolio quality and financial performance of banks: Evidence from Ghana. International Journal of Business and Management Studies, 7(2), 25–34. [Google Scholar] [Crossref]

20. Elton, E. J., Gruber, M. J., Brown, S. J., & Goetzmann, W. N. (2014). Modern portfolio theory and investment analysis (9th ed.). Wiley. [Google Scholar] [Crossref]

21. Fernando, J. (2019). Buffer capital. Investopedia. [Google Scholar] [Crossref]

22. Fiordelisi, F., & Mare, D. S. (2014). Competition and financial stability in European cooperative banks. Journal of International Money and Finance, 45, 1–16. [Google Scholar] [Crossref]

23. Fonseca, A. R. (2020). The role of capital buffers in banking stability: A post-crisis analysis. Journal of Banking and Financial Stability, 13(4), 223–239. [Google Scholar] [Crossref]

24. Gakure, R. W. (2018). Loan default and the performance of commercial banks in Kenya. Journal of Finance and Investment Analysis, 7(4), 39–51. [Google Scholar] [Crossref]

25. Gakure, R. W. (2018). Loan default and the performance of commercial banks in Kenya. Journal of Finance and Investment Analysis, 7(4), 39–51. [Google Scholar] [Crossref]

26. Giannetti, M. (2017). The real effects of bank shocks: Evidence from loan portfolios. Review of Financial Studies, 30(1), 54–97. [Google Scholar] [Crossref]

27. Githaiga, P. N. (2015). Effect of Credit Risk Management Practices on the Financial Performance of Deposit Taking Savings and Credit Cooperative Societies in Kenya. [Master’s Thesis, University of Nairobi], Kenya. [Google Scholar] [Crossref]

28. Gonzalez-Uribe, J., & Montor, M. (2017). Loan quality and the U.S. banking system: Trends and determinants. Journal of Financial Economics, 124(2), 327–342. [Google Scholar] [Crossref]

29. Ibrahim, B. (2016). The impact of loan portfolio quality on the financial performance of Nigerian banks. Journal of Economics and Sustainable Development, 7(19), 103–110. [Google Scholar] [Crossref]

30. Ibrahim, M., & AlQahtani, F. (2018). Financial performance metrics and banking efficiency. International Journal of Economics and Financial Issues, 8(4), 90–98. [Google Scholar] [Crossref]

31. Ibrahim, M., & AlQahtani, F. (2018). Financial performance metrics and banking efficiency. International Journal of Economics and Financial Issues, 8(4), 90–98. [Google Scholar] [Crossref]

32. Johnson, T., Lee, C., & Kim, D. (2018). Buffer capital and lending behavior of commercial banks. Journal of Financial Services Research, 53(3), 289–310. [Google Scholar] [Crossref]

33. Jokipii, T., & Milne, A. (2008). The cyclical behaviour of European bank capital buffers. Journal of Banking & Finance, 32(8), 1440–1451. [Google Scholar] [Crossref]

34. Karim, M. Z. A., Chan, S. G., & Hassan, S. (2010). Bank efficiency and non-performing loans: Evidence from Malaysia and Singapore. Prague Economic Papers, 19(2), 118–132. [Google Scholar] [Crossref]

35. Karim, M. Z. A., Chan, S. G., & Hassan, S. (2010). Bank efficiency and non-performing loans: Evidence from Malaysia and Singapore. Prague Economic Papers, 19(2), 118–132. [Google Scholar] [Crossref]

36. Kuria, N. (2018). The effects of economic shocks on loan portfolio performance in Kenyan banks. African Journal of Economic Policy, 25(1), 77–92. [Google Scholar] [Crossref]

37. Kusi, B. A., Agbloyor, E. K., Ansah-Adu, K., & Gyeke-Dako, A. (2017). Bank profitability and capital regulations in Africa. Review of Financial Economics, 33, 22–30. [Google Scholar] [Crossref]

38. Lamont, O. (2018). Loan underwriting and performance in U.S. commercial banks. American Economic Review, 108(3), 710–745. [Google Scholar] [Crossref]

39. Lee, C. C., & Hsieh, M. F. (2013). The impact of bank capital on profitability and risk in Asian banking. Journal of International Money and Finance, 32, 251–281. [Google Scholar] [Crossref]

40. Liu, Y. (2017). Ownership structure and loan portfolio performance in UK and Chinese banks. International Review of Financial Analysis, 52, 1–11. [Google Scholar] [Crossref]

41. Markowitz, H. (1952). Portfolio selection. The Journal of Finance, 7(1), 77–91. [Google Scholar] [Crossref]

42. Mugo, R., & Kiragu, D. (2020). Loan default and financial performance of commercial banks in Kenya. European Journal of Business and Management, 12(9), 34–44. [Google Scholar] [Crossref]

43. Mugo, R., & Kiragu, D. (2020). Loan default and financial performance of commercial banks in Kenya. European Journal of Business and Management, 12(9), 34–44. [Google Scholar] [Crossref]

44. Murira, N. K. (2014). Effect of Credit Risk Management on Financial Performance of Commercial Banks in Kenya. [Master’s Thesis, University of Nairobi], Kenya. [Google Scholar] [Crossref]

45. Nguyen, T. (2020). Banking intermediation and credit risk management. International Journal of Economics and Finance, 12(1), 88–98. [Google Scholar] [Crossref]

46. Repullo, R., & Suarez, J. (2013). The procyclical effects of bank capital regulation. Review of Financial Studies, 26(2), 452–490. [Google Scholar] [Crossref]

47. Richardson, R. J. (2012). Measuring the Performance of Financial Institutions. Journal of Banking and Finance, 12(3), 67–82. [Google Scholar] [Crossref]

48. Shim, J. (2013). Bank capital buffer and portfolio risk: The role of discretionary loan loss provisions. Journal of Financial Services Research, 44(3), 307–331. [Google Scholar] [Crossref]

49. World Bank. (2013). Global Financial Development Report 2013: Rethinking the Role of the State in Finance. Washington, DC: The World Bank. [Google Scholar] [Crossref]

50. World Bank. (2014). Global Financial Development Report 2014: Financial Inclusion. Washington, DC: The World Bank. [Google Scholar] [Crossref]

51. Yang, Y., Liu, C., & Yeung, D. (2019). Non-performing loans and profitability in Chinese banks: Governance and risk perspectives. China Economic Review, 55, 40–55. [Google Scholar] [Crossref]

52. Yang, Y., Liu, C., & Yeung, D. (2019). Non-performing loans and profitability in Chinese banks: Governance and risk perspectives. China Economic Review, 55, 40–55. [Google Scholar] [Crossref]

• The Correlation of Marketing Strategies and Financial Performance of Motor Parts Businesses in the City of Mati
• The Role of Blockchain-Based Smart Contracts in Enhancing Financial Transparency and Efficiency in the Emerging Market
• Exploring Intention among Universiti Teknologi Mara Terengganu Community to Donate into Education Waqf Fund
• Utilizing AHP Method to Rank Preference of Waqf Fund Usage for UiTM Terengganu, Malaysia
• The Influence of Portfolio Diversification on Financial Performance: Evidence from Listed Banks on the Ghana Stock Exchange