Credit Risk Management Strategies and Loan Performance of Banks in Kenya

Credit risk management is essential for maintaining loan portfolio quality and ensuring sustainable lending operations among banks in Kenya. This study synthesises existing literature on the relationship between credit risk management strategies and loan performance, focusing on Know Your Customer (KYC) procedures, creditworthiness assessment, and collateral and loan security. The study adopts a literature synthesis approach, reviewing relevant scholarly publications and examining their theoretical foundations, empirical findings, and research gaps. The review is guided by the Merton Model and Information Asymmetry Theory, which explain borrower default risk and the challenges arising from unequal access to information between lenders and borrowers. The synthesis indicates that effective KYC procedures strengthen borrower identification and information verification, creditworthiness assessment supports informed lending decisions, and collateral and loan security provide mechanisms for mitigating potential credit losses. The reviewed literature generally associates effective credit risk management practices with improved loan portfolio quality, reduced non-performing loans, and stronger banking performance. However, the effectiveness of these strategies depends on their implementation, the reliability of borrower information, and the integration of credit appraisal, loan monitoring, and recovery procedures. The review also identifies the need for further research examining the relationship between these strategies and direct loan performance indicators, including repayment rates, non-performing loan ratios, loan recovery rates, and default rates. The study concludes that comprehensive credit risk management is important for strengthening loan performance and promoting sustainable lending operations in Kenya.