Union Microfinance Company Limited (UMCL or “the Company”) is a public unlisted Non-Banking Finance Company (NBFC) incorporated in Pakistan on July 27, 2021 under the Non-Banking Finance Company Rules, 2003 and the Companies Act, 2017. The Company was granted a license by the Securities and Exchange Commission of Pakistan (SECP) on September 30, 2021 to provide microfinance and microcredit to individuals, including small businesses, farmers (Agri Loans), and women entrepreneurs across the country. The Company operates under the SECP’s NBFC Rules & Regulations, and is required to maintain a minimum equity of Rs. 50 million under Schedule I of the Regulations. The registered head office of the Company is situated at 903 Clifton Diamond Building, Block-4, Clifton, Karachi.

UMCL commenced it commercial operations in February 2022, with its first branch established in Karachi. The Company was established with a mission to tap Pakistan's unbanked population and bring individuals into the ambit of financial inclusion, with a particular emphasis on women; especially those engaged in cottage industries and home-based enterprises. Beyond its women-focused mandate, UMCL extends credit across four defined target segments: (i) women engaged in domestic and home-based enterprises; (ii) professionals in the health and education sectors; (iii) salaried employees and pensioners seeking small-ticket structured financing; and (iv) micro-enterprises requiring working capital support. The Company's geographic presence remains concentrated in Sindh; specifically, Karachi with zero borrower activity in Punjab, Balochistan, KPK, Gilgit-Baltistan, or Azad Kashmir as at December 2025. The Company's loan portfolio has historically spanned six product lines, with disbursements across salary, gold-backed, women's enterprise (Niswan), education (School), and pension segments since inception. Gold-backed products have progressively become the dominant product category, constituting approximately 88% of the active portfolio as at December 2025, reflecting the Company's strategic preference for secured, lower-risk lending. As a Non-Banking MFI, UMCL relies on shareholder equity, subordinated loans, and internal revenues to fund its operations it does not have the ability to mobilize public deposits, which is a structural funding constraint inherent to its NBFC license category.

UMCL operates under the for-profit model, providing small-ticket secured and structured credit products to low-income individuals and micro-enterprises. The Company’s product suite as at December 2025 comprises six active instruments: (i) Union Gold Loan; Bullet (individual): a lump-sum repayment product fully secured against gold ornaments, representing 25 active loans with outstanding principal of ~PKR 5.89mln (~34.67% of GLP); (ii) Union Gold Loan; EMI (individual): an installment-based gold-secured product, representing 63 active loans with outstanding principal of ~PKR 9.09mln (~53.51% of GLP); the largest single product by portfolio share; (iii) Union Niswan Loan (individual): a women’s enterprise lending product, with 13 active loans and outstanding balance of ~PKR 0.3mln (~1.83% of GLP); (iv) Union School Loan EMI: an education sector product with 1 active loan and outstanding balance of ~PKR 0.04mln (~0.25% of GLP); (v) Union Salary Loan Employee: disbursed to salaried employees, with 8 active loans and outstanding balance of ~PKR 0.9mln (~5.46% of GLP); and (vi) Union Salary Loan Individual: extended to individuals on the basis of income, with 17 active loans and outstanding balance of ~PKR 0.7mln (~4.27% of GLP). The Union Pension Loan product had no active disbursements as at December 2025. In aggregate, the total gross loan portfolio (GLP) stood at ~PKR 16mln across ~127 active borrowers. Gold-backed products (Bullet and EMI combined) constituted approximately ~88.18% of the GLP, providing a secured collateral backstop and materially limiting credit loss risk. The Company operates exclusively from its single branch in Karachi, which currently constrains geographic outreach and borrower diversification. In line with its medium-term strategy, management does not intend to open new branches in the near-to-medium term, with the strategic focus remaining on deepening portfolio penetration and improving productivity within the existing operational footprint.

The Company is held by five shareholders. Mr. Zahair Amir Ali Pesnani, the Chairman, holds ~37.54% the largest individual stake. The remaining equity is distributed as follows: Marine Foods Industries (Pvt.) Ltd. (~30.92%), Mr. Ali Remioo (~18.50%), Ms. Sharmeen Ali (~10.51%), and Mr. Altaf Kasim Allana (~2.47%). The entry of Marine Foods Industries as a corporate shareholder during CY25 the entity subscribed to ~PKR 61.7mln of fresh equity is a significant structural development that has formally diversified the ownership base and demonstrated institutional commitment to the Company's recapitalization. Mr. Syed Saeed Raza (~0.01%), previously disclosed, appears to have exited the shareholding.

The ownership structure is considered stable in the near-to-medium term. The Pesnani family retains effective control through the Chairman's individual stake and his connection to Marine Foods Industries (a related corporate entity), together representing the dominant economic interest. The track record of ongoing sponsor support through equity injections and subordinated loans is a meaningful comfort, though a formal succession framework has not been established. The absence of such a framework remains an area for improvement, particularly given the Company's early-stage operational profile.

The sponsor group has demonstrated good financial sector acumen. The Chairman, Mr. Zahair Amir Ali Pesnani, is a qualified Chartered Accountant with over three decades of financial services experience. The ownership collective brings a blend of microfinance domain knowledge, investment management experience, and corporate governance exposure. Business acumen is considered adequate.

Sponsor financial strength is considered adequate, primarily evidenced by their demonstrated willingness and ability to inject capital. The ~PKR 61mln equity subscription in CY25 which raised paid-up capital from ~PKR 100mln to ~PKR 161mln and restored the Company above SECP's ~PKR 50mln minimum equity threshold represents the most concrete evidence of sponsor support to date. However, the Company's balance sheet remains under stress given accumulated losses of ~PKR 139mln against paid-up capital of ~PKR162mln as at December 2025.

The Board of Directors (BoD) has been strengthened during CY25, by inducting two new Independent Directors with a materially improved independence profile. The reconstituted Board comprises (Mr. MumtazHadi, CEO), one Non-Executive Director and Chairman (Mr. Zahair Amir Ali Pesnani), and two Independent Non-Executive Directors (Ms. Shabnam Minhas and Mr. Ali Murtaza). The induction of two independent directors is a positive governance development. The Board is chaired by Mr. Zahair Amir Ali Pesnani.

The Board of Directors comprises four members as of December 2025. Mr. Zahair Amir Ali Pesnani serves as Chairman and Non-Executive Director, a qualified Chartered Accountant with over 30 years of experience and a founding member of the Company. Mr. Mumtaz Hadi, the CEO, serves as the CEO with over 30 years of banking experience and has been associated with the Company since its inception. Two Independent Non-Executive Directors were inducted during CY25: Ms. Shabnam Minhas, a banker and trainer with 20+ years of experience, serving on the HR & Remuneration Committee; Mr. Ali Murtaza, a qualified Chartered Accountant with 30+ years of experience, also on the HR & Remuneration Committee. All four board members participated in all three board meetings held during the year.

The Board meets at regular intervals to oversee the Company's performance and provide strategic direction. Three standing sub-committees have been constituted: (i) HR & Remuneration Committee, (ii) Risk Management Committee, and (iii) Audit Committee. The presence of three independent directors enhances the functional independence of the Audit and Risk Management Committees in particular, which is important given the Company's ongoing capital adequacy and asset quality monitoring requirements.

M/S BDO Ebrahim & Co. Chartered Accountants, listed in the category “A” on the SBP’s panel of auditors, are the External Auditors of the company, and they have expressed an unqualified opinion on the financial statement of the Company for the year ended 31st December 2025.

UMCL operates through a horizontally distributed organizational structure comprising eight departments, each with a dedicated department head who reports directly to the CEO. Reporting lines and job descriptions are clearly defined across all levels. All key positions are currently filled, and a Management Committee comprising departmental heads facilitates inter-departmental coordination and operational streamlining.

The management team has been meaningfully reinforced during CY25. Mr. Mumtaz Hadi continues as Chief Executive Officer, bringing over 30 years of diversified financial services experience. A significant development is the appointment of Mr. Zulfiqar Ali as Chief Financial Officer & Company Secretary, a 40+ year financial services veteran whose presence strengthens the Company's financial reporting, regulatory compliance, and internal controls capacity. Ms. Shazia Abou Talib was designated Head of HR & Administration in early CY26. The credit and risk function continues to be overseen by Mr. Abdul Ghani, who brings over three decades of credit risk management experience.

The Company operates through a well-defined organizational structure with clearly delineated roles, reporting lines, and responsibilities across all eight departments. A Management Committee comprising all departmental heads facilitates inter-departmental coordination, operational decision-making, and ensures strategic directives are cascaded effectively across the organization. The recent strengthening of the finance function through the induction of a seasoned CFO & Company Secretary has meaningfully enhanced financial governance, internal controls, and regulatory compliance capacity. The CEO directly supervises all department heads, maintaining a short chain of command appropriate for the Company's current scale of operations. Overall, management effectiveness is considered adequate, with demonstrated ability to execute cost rationalization, maintain portfolio quality, and deliver improving financial outcomes through a challenging operating period.

The Company utilizes "Munsalik's Shared Services" as its core Management Information System, a purpose-built platform designed to digitize MFI operations without requiring large-scale infrastructure investment. This is supplemented by a dedicated Loan Management System (LMS) that digitizes customer onboarding, credit appraisal, and loan origination workflows. Integration with branchless banking networks is enabled through the IRIS middleware, providing access to third-party financial service providers. The MIS infrastructure is considered adequate for the Company's current scale of operations.

The Company maintains a standalone Risk Management department responsible for oversight of credit, operational, liquidity, and market risks. A Risk Management Manual covering all four risk categories provides the policy framework for senior management decision-making. Internal audit is operationally independent, reporting directly to the Board's Audit Committee, providing an appropriate check on compliance with approved operating procedures. On credit risk, the Company has developed a formal credit counterparty assessment policy applicable to all customer, bank, and third-party relationships. Cash holdings are restricted to banks with Advances are extended at fixed lending rates ranging between ~25%–51% per annum, depending on product type. As at December 2025, the total credit exposure of the Company across all financial assets stood at ~PKR 55mln, comprising advances net of provisions (~PKR 16mln), loans to directors (~PKR 32mln), bank balances (~PKR 6mln), security deposits (~PKR 0.3mln), and accrued markup (~PKR 0.5mln). On liquidity risk, management monitors cash flow positions and balance sheet liquidity ratios on a continuous basis. The maturity profile of financial liabilities as at December 2025 shows all obligations falling within the less-than-one-year bucket at ~PKR 3.9mln (CY24: ~PKR 5.0mln), indicating no medium or long-term liability mismatch. The Company's approach is to maintain sufficient liquidity to meet obligations under both normal and stressed conditions. On market risk, the Company's primary exposure is interest rate risk on its variable-rate PLS savings account (profit rate ~11%–20.5%) and lease obligation (KIBOR+5%). Lending advances are fixed-rate instruments (~25%–51%), and accordingly a change in market rates does not directly affect the income statement on the asset side. A 100-basis point movement in variable-rate instruments would impact profit by approximately ~PKR 0.06mln, a negligible sensitivity given the current balance sheet size. The Company has no foreign currency exposure. Given the Company's early-stage profile and single-branch operations, the risk management architecture is considered adequate. However, as the portfolio scales, commensurate strengthening of risk monitoring capacity, particularly around portfolio-at-risk tracking and borrower-level delinquency management will be increasingly important.

UMCL's technology infrastructure, comprising the LMS for loan lifecycle management and the IRIS middleware for ecosystem connectivity, is considered appropriate for its current operational scale. The Company has also adopted digital disbursement channels, reducing reliance on cash transactions. Investment in technology has been sustained even through the cost rationalization phase, as evidenced by a modest increase in IT-related fee and subscription costs in CY25.

Pakistan's microfinance ecosystem, comprising Microfinance Banks (MFBs), Microfinance Institutions (MFIs), Rural Support Programmes (RSPs), and FinTechs, continued its expansion in CY25 against a backdrop of improving macroeconomic conditions. Inflation moderated sharply to ~4.5% in FY25 from ~23.4% in FY24, the monetary policy rate was reduced to ~11.0% by year-end (FY24: ~20.5%), and real GDP growth stood at ~3.0% in FY25, with FY26 projections ranging between ~2.6%–3.6% across multilateral institutions. These developments collectively improved the operating environment for credit expansion, though residual stress from prior years including the 2022 and 2025 flood events, continued to weigh on asset quality across certain sub-segments. The sector's aggregate Gross Loan Portfolio (GLP) expanded significantly to ~PKR 854.0bln in CY25 (CY24: ~PKR 597.6bln), reflecting a YoY increase of ~42.9% and a five-year CAGR of ~16.8% since CY21. MFBs retained their dominant position, accounting for ~63.9% of the sector GLP (~PKR 546.0bln), recording ~18.6% YoY growth. The more material shift, however, occurred in the MFI and RSP sub-segment, whose combined GLP nearly doubled to ~PKR 308.0bln (CY24: ~PKR 137.4bln) a YoY surge of ~124.1%, driven primarily by Akhuwat Microfinance, which accounted for approximately ~73% of this incremental growth through higher housing loans supported by Punjab government schemes. The sector's active borrower base rose to ~13.4mln (CY24: ~12.3mn), a YoY increase of ~8.9%, with the average loan size increasing to ~PKR 63,552 (CY24: ~PKR 48,585) largely driven by the shift toward larger-ticket housing loans within MFIs. For the MFI sub-segment specifically, which is the peer group most directly relevant to UMCL, the performance trajectory has been notably positive. The infection ratio for MFIs remained subdued at ~1.1% in FY25 (FY24: ~1.3%), declining further to ~0.9% in 1HFY26, attributable to smaller loan sizes, community-driven lending models, and stronger borrower engagement that collectively foster greater repayment discipline relative to MFBs. The MFB segment, in contrast, continued to face elevated stress. The aggregate infection ratio, while improving to ~9.1% in CY25 from ~9.7% in CY24, remains elevated. The sector-wide CAR deteriorated to -1.2% in CY25, well below SBP's 15% minimum though this is largely attributable to two distressed MFBs; excluding these, the sector CAR stands at a more manageable level. MFBs' aggregate equity contracted from ~PKR 37.2bln in CY24 to ~PKR 25.6bln in CY25, reflecting ongoing provisioning pressure.  Looking ahead, the declining interest rate environment with the policy rate at 11.0% as of the end of FY25 is expected to compress portfolio yields across the sector, particularly for gold-backed and salary lending products. For UMCL, whose advances are priced at fixed rates of 25%–51%, this creates both an opportunity (lower funding cost on any future borrowings) and a competitive pricing pressure. The sector's medium-term trajectory will depend on the ability of individual institutions to scale their borrower base, maintain asset quality, and diversify funding sources all of which remain active challenges for UMCL in its current state.

UMCL occupies a marginal position within Pakistan's microfinance sector. With a GLP of ~PKR 16mln as at December 2025 and ~127 active borrowers served from a single branch in Karachi, the Company's market share is negligible relative to the sector's ~PKR 597bln GLP. This micro-scale creates significant structural vulnerabilities: overhead costs cannot be meaningfully absorbed, brand recognition is limited, and the Company lacks the borrower diversification that characterizes operationally viable MFIs. Expansion of the geographic footprint, product breadth, and active borrower base is imperative for a meaningful improvement in the Company's competitive standing and rating trajectory

The revenue profile deteriorated materially in CY25, primarily reflecting the severe contraction in the loan portfolio that took place through CY23–CY24. Markup earned on advances declined to ~PKR 5mln in CY25 from ~PKR 28mln in CY24, and ~82% reduction as the average earning asset base shrank substantially. Total income turned negative at ~PKR 2mln in CY25, as finance charges on the then-outstanding subordinated loan tranche ~PKR 7mln exceeded the Company's combined markup and non-markup income. This represents the sharpest revenue deterioration in the Company's operating history and underscores the urgency of portfolio expansion

Profitability remained in deficit territory in CY25, though the loss trajectory continues to improve markedly. Net loss narrowed to ~PKR 21mln in CY25 from ~PKR 37mln in CY24 and ~ PKR 43mln in CY23, representing a cumulative improvement of ~51% over two years. A net ECL reversal of ~PKR 2mln (versus a provision charge of ~PKR 2mln in CY24) provided additional relief. Finance costs also declined from ~PKR 24mln to ~PKR 7mln, reflecting the partial repayment of the interest-bearing subordinated loan tranche during the year. Return on equity improved to -36.7% (CY24: -66.2%) and return on assets to -33.1% (CY24: -34.0%). The Operational Self Sufficiency (OSS) ratio remains severely below the 100% threshold at 18.7% (CY24: 47.2%), indicating that operating revenues are insufficient to cover total costs, a structural concern that directly ties to the inadequacy of the current GLP.

UMCL's sustainability prospects have improved on a relative basis but remain contingent on a decisive portfolio recovery. The Company's management has demonstrated discipline in cost management and has successfully executed key structural improvements, such as the equity recapitalization, the repayment of the interest-bearing subordinated loan, and the strengthening of senior management. These steps collectively reduce the operating cost burden and provide a cleaner balance sheet for future growth. The Company insures its total loan portfolio with EFU, mitigating tail-risk on the current gold and salary book. However, the fundamental sustainability challenge insufficient earning asset base to cover fixed overhead, will not be resolved until the GLP is scaled to a level where revenues meaningfully exceed operating costs. Management's stated commitment to expanding the borrower base and potentially adding branches is the critical forward-looking variable. In the absence of concrete progress on portfolio growth, the current trajectory, while improving, does not yet support a materially higher rating.

UMCL's loan book continues to be anchored by gold-secured products, which comprise approximately ~88% of the GLP as at December 2025 (CY24: ~76%), providing a strong physical collateral backstop. This gold concentration, while creating portfolio concentration risk, has effectively insulated the Company from credit losses: write-offs remain nil across the entire operating history of the Company. The PAR 30 ratio stands at 7.8% as of December 2025. It is noted, however, that the Company's granularity is extremely limited, with only 127 active borrowers; portfolio-level PAR metrics can shift materially from a small number of delinquencies, and the Top-20 borrowers represented 55.4% of total advances as at December 2025. The ECL reversal of ~PKR 2mln in CY25 suggests improving collection quality on the residual book, but the concentrated nature of the portfolio demands ongoing vigilance. Risk coverage ratios are not meaningful given the near-zero NPL position. Future portfolio growth, especially any expansion into unsecured products such as salary or women's enterprise loans, will require commensurate strengthening of the underwriting and collections framework.

UMCL does not maintain an investment book and accordingly, has no direct exposure to mark-to-market risk on securities. The Company holds no foreign currency assets or liabilities, eliminating FX risk. The primary market risk is repricing risk on the loan portfolio: as policy rates decline, the Company's portfolio yield is expected to compress, given the pricing linkage of its products to prevailing benchmarks. The portfolio yield declined to ~29.6% in CY25 (CY24: 58.1%) though the CY24 figure was inflated by residual income on the large prior-year book. In a declining rate environment, sustaining an adequate spread becomes challenging, particularly with the cost of the remaining subordinated debt and operating overhead to cover. The absence of a liquid investment buffer also means the Company has no yield-generating cushion against portfolio depletion.

UMCL's funding structure has undergone a material transformation over the review period. As at December 2025, external borrowings from financial institutions stand at zero (CY23: ~PKR 92mln). The Company had previously drawn lines from JS Bank and Pakistan Microfinance Investment Company (PMIC), all of which have been fullyrepaid. The Company now funds its operations entirely from internal equity, comprising: (i) paid-up share capital of~PKR 162mln (following the ~PKR 61mln equity subscription by Marine Foods Industries in CY25); and (ii) a subordinated loan balance of ~PKR 32mln from two directors (Mr. Zahair Amir Ali Pesnani: ~PKR 25mln; Mr. AliRemioo: ~PKR 7mln), both interest-free with no defined repayment schedule as at the review date. While a zero-debt structure eliminates refinancing risk and finance cost pressure, the management of the company has informed that they have approached PMIC and other commercial banks for funding. Given strong governance structure, product diversification and secured nature of lending with strong margins, Union Microfinance is all set to generate profits, provided they are able to secure external funding, which will be the key determinant of growth trajectory and rating outlook.

The Company's liquidity position, while not constrained in the near term, is structurally narrow. Cash and bank balances stood at ~PKR 7mln as at December 2025 (CY24: ~PKR 7mln), equivalent to approximately 12% of total assets. The non-earning assets-to-total-assets ratio was ~73.3% as of December 2025 (CY24: ~71.2%), meaning nearly three-quarters of the balance sheet generates no income, a fundamental structural drag on profitability. Finance expense ratio improved sharply to ~42.9% in CY25 from ~46.3% in CY24 on a nominal basis, though the ratio's apparent level in CY25 is distorted by the collapse in the revenue denominator. With the interest-bearing subordinated loan tranche fully repaid, finance costs in CY26 are expected to be near-negligible, as evidenced by the ~1.0% financial expense ratio in 1QCY26.

SECP does not impose a minimum Capital Adequacy Ratio (CAR) for Non-Bank Microfinance Companies, unlike the SBP's 15% CAR requirement for Microfinance Banks. However, SECP mandates a minimum equity threshold of ~PKR 50mln for licensed MFIs. As of December 2025, UMCL's total equity (including the subordinated loan of ~PKR 32mln) stands at ~PKR 54mln, providing a marginal buffer of ~PKR 4mln above the regulatory minimum. The equity-to-total-assets ratio was ~89.7% at December 2025 (CY24: ~89.3%), reflecting the Company's predominantly equity-funded balance sheet. While this ratio is numerically strong, it is structurally misleading the high equity-to-asset ratio exists because the Company has minimal external liabilities, not because of a strong retained earnings base. Accumulated losses of ~PKR 139mln against paid-up capital of ~PKR 162mln underscore the fragility of the equity base. The capital formation rate improved to -35.1% in CY25 from -72.5% in CY24, reflecting the narrowing loss trajectory, but it remains deeply negative. Ongoing losses continue to erode equity, creating a structural imperative for the Company to achieve profitability before its equity cushion is further depleted.