Abstract
Credit assessment remains a critical function in commercial banking because of its influence on loan performance and overall financial stability. This study examined the effect of selected credit assessment criteria on loan performance in Kenyan commercial banks, with particular focus on borrower character and collateral requirements. Despite the growing importance of effective credit appraisal, empirical evidence on the relative contribution of these factors to loan performance in Kenya remains limited. The study was anchored on the Credit Rationing Theory and the Credit Hazard Model. A descriptive and correlational research design was adopted to examine trends and relationships between credit assessment practices and loan performance from 2015 to 2024. A census of all 38 commercial banks licensed by the Central Bank of Kenya as at December 2024 was conducted. Secondary data were collected from Central Bank of Kenya reports, audited financial statements, and other published banking records. Data were analyzed using SPSS version 27 through descriptive statistics and panel regression analysis. The findings revealed that borrower character and collateral requirements had a positive and statistically significant influence on loan performance. Borrower character emerged as the most influential predictor, explaining 84% of the variation in loan performance, while collateral requirements explained 82% of the variation. The results indicate that borrowers with strong repayment histories and low default records are more likely to maintain satisfactory loan performance. Similarly, adequate collateral coverage enhances loan recovery and reduces credit risk exposure. The study concludes that borrower character and collateral requirements are critical determinants of loan performance in Kenyan commercial banks. The study recommends that commercial banks strengthen credit appraisal systems by placing greater emphasis on borrowers’ repayment history, creditworthiness, and collateral adequacy during loan evaluation and monitoring processes. These measures are likely to improve loan quality, reduce default rates, and enhance the stability of the banking sector in Kenya.
Keywords: Borrower Character, Collateral Requirements, Credit Assessment, Loan Performance, Commercial Banks, Kenya.