Shear banding is widely observed in natural fault zones as well as in gouge layers in laboratory experiments. Understanding the dynamics of strain localization under different loading conditions is essential for quantifying strength evolution of fault gouge, energy partitioning during earthquakes and characterizing rheological transitions and fault zone structure changes. To that end, we develop a physics-based continuum model for strain localization in sheared granular materials. The grain-scale dynamics is described by the Shear Transformation Zone (STZ) theory, a non-equilibrium statistical thermodynamic framework for viscoplastic deformation in amorphous materials. Using a finite strain computational framework, we investigate the initiation and growth of complex shear bands under a variety of loading conditions and identify implication for strength evolution and ductile to brittle transition. Our numerical results show similar localization patterns to field and lab observations and suggest that shear zones show more ductile response at higher confining pressures, lower dilatancy and loose initial conditions. Lower pressures, higher loading rates and higher dilatancy favor a brittle response and larger strength drops. These findings shed light on a range of mechanisms for strength evolution in dry sheared gouge and provide a critical input to physics-based multiscale models of fault zone instabilities.