Effect of Client Appraisal on Loan Performance of Commercial Banks in Kenya

Abstract

Commercial banks depend mainly on lending activities as an important source of income, but lending exposes commercial banks to credit risk arising from uncertainty about borrowers’ ability and willingness to repay. Therefore, effective client appraisal is important in obtaining and verifying information about borrowers before credit is advanced. This study examined the effect of client appraisal on the loan performance of commercial banks in Kenya. The study was anchored on Asymmetric Information Theory, which explains how information differences between lenders and borrowers can contribute to adverse selection and moral hazard in credit markets. A cross-sectional survey design was adopted. The target population comprised 38 licensed commercial banks in Kenya, with one credit-risk manager targeted from each bank. Three banks were used for piloting, leaving 35 banks for the main study. A census approach was used, and 33 usable questionnaires were returned, representing a response rate of 94.3%. Primary data were collected using a structured questionnaire, while secondary information was obtained from relevant banking records and regulatory reports. Descriptive statistics, Pearson correlation and simple linear regression were used to analyse the data. The findings showed that commercial banks widely practised client appraisal, particularly through collateral valuation, verification of collateral documentation, assessment of collateral adequacy, evaluation of credit history and review of previous credit records. Pearson correlation analysis established a strong positive relationship between client appraisal and loan performance (r = .785, p < .001). The corresponding simple linear regression indicated that client appraisal explained 61.6% of the variation in loan performance (R² = .616). The study concludes that stronger client appraisal is associated with better loan performance among commercial banks in Kenya. The study recommends that commercial banks strengthen borrower-information verification, credit-history assessment, collateral evaluation and other appraisal mechanisms while integrating traditional appraisal with reliable digital credit-information systems.