New Reporting Standards Sink Finca into UGX665 million Loss from UGX 4.9 billion Profit Rising impairment charges, shrinking interest margins, and higher operating costs push FINCA Uganda into loss despite growth in lending, digital activity, and improved asset quality.

FINCA Uganda Managing Director James Onyutta is facing a challenging year ahead after the microfinance deposit-taking institution slipped into the red, posting a net loss of UGX 662.24 million for the year ended December 31, 2025, a sharp reversal from the UGX 4.90 billion profit recorded in 2024.

The collapse in profitability was largely driven by a sharp increase in impairment charges, which rose from UGX 7.73 billion in 2024 to UGX 10.27 billion in 2025, significantly raising provisions against potential loan losses and weighing heavily on earnings.

As disclosed in its audited results, the increase in impairment was linked to the implementation of an enhanced IFRS 9 expected credit loss provisioning model.

During the year, FINCA Uganda transitioned from a collateral-based approach to a forward-looking recovery-based model, placing greater emphasis on expected post-default cash recoveries, particularly in group lending and micro-enterprise segments.

This refinement, aligned with observed recovery patterns and prevailing economic conditions affecting low-income borrowers, resulted in a material strengthening of provisioning reserves and a corresponding increase in impairment expense compared to the prior year.

At first glance, the result looks surprising.

This is because several operating indicators still moved in the right direction. Loans and advances to customers rose. Other income increased. Grant income jumped. Non performing loans declined. Capital adequacy remained strong. Digital activity expanded. Yet, despite some gains, profitability collapsed.

From profit to loss

The biggest shift is the movement from a UGX 4.90 billion profit in 2024 to a UGX 662.24 million loss in 2025.

That reversal came after profit before tax narrowed dramatically from about UGX 6.97 billion in 2024 to a pre tax loss of UGX 385.38 million in 2025. Once a tax charge of UGX 276.86 million was booked, the institution closed the year in the red.

So the question is simple. What changed between a near UGX 7 billion pre tax profit in 2024 and a pre tax loss in 2025?

The answer begins with revenue pressure.

Interest income fell even as the loan book grew.

FINCA Uganda’s loans and advances to customers increased by 5 percent from UGX 136.18 billion in 2024 to UGX 142.99 billion in 2025.

Under normal circumstances, a growing loan book should support stronger interest income. But that did not happen here.

Instead, interest income fell from UGX 63.34 billion in 2024 to UGX 61.38 billion in 2025.

That matters because interest income is the core earnings engine for a lending institution like FINCA. A decline here means the institution earned less from its main business, even though its customer loan portfolio expanded.

This suggests that asset yields were under pressure, loan repricing may not have fully compensated for the environment, or a more cautious and recovery based lending posture limited revenue extraction from the growing book.

At the same time, funding costs moved in the opposite direction.

Interest expense increased from UGX 14.49 billion in 2024 to UGX 16.34 billion in 2025.

When income from loans declines but the cost of funds rises, the margin gets squeezed from both sides. That is exactly what happened.

As a result, net interest income fell from UGX 48.85 billion in 2024 to UGX 45.04 billion in 2025.

This is a drop of roughly UGX 3.81 billion, and it is one of the clearest reasons the bottom line weakened.

In simple terms, FINCA earned less from lending after paying for its funding, placing significant pressure on profitability even before operating costs and provisions came into play.

The pressure did not stop at interest margins.

Fees and commission income declined from UGX 2.34 billion in 2024 to UGX 2.13 billion in 2025, while fees and commission expense rose from UGX 271.85 million to UGX 299.01 million.

This pushed net fee and commission income down from UGX 2.07 billion in 2024 to UGX 1.83 billion in 2025.

That is another earnings line moving in the wrong direction, weakening an already pressured income base.

Not every line deteriorated.

Other income increased from UGX 5.07 billion in 2024 to UGX 5.66 billion in 2025, while grant income rose strongly from UGX 1.73 billion to UGX 2.45 billion, a jump of 41.5 percent.

These gains show that FINCA was not standing still operationally. The institution was generating more support income beyond the loan book, and its strategic partnerships were producing results.

But the problem is that these gains were not large enough to offset the decline in net interest income and the spike in provisioning and operating costs.

As a result, net operating income declined from UGX 57.72 billion in 2024 to UGX 54.98 billion in 2025.

This created a weaker earnings base from which to absorb rising costs.

Impairment charges tip the balance

On the cost side, pressures continued to build.

Employee benefit expense increased from UGX 22.45 billion in 2024 to UGX 22.92 billion in 2025, while other operating expenses rose from UGX 19.86 billion to UGX 20.96 billion.

At the same time, grant expenses increased from UGX 190.42 million to UGX 583.05 million, and finance costs rose from UGX 524.18 million to UGX 640.88 million.

Individually, some of these increases appear manageable. Collectively, in a year of declining income, they became far more significant.

The real turning point, however, came from provisioning.

The impairment charge for credit losses rose sharply from UGX 7.73 billion in 2024 to UGX 10.27 billion in 2025, an increase of about UGX 2.54 billion.

Management attributed this to the adoption of a more conservative IFRS 9 expected credit loss model, shifting from a collateral based approach to a forward looking recovery based model.

This model places greater emphasis on expected post default cash recoveries and reflects prevailing economic conditions affecting low income borrowers.

In practical terms, FINCA chose to recognise risk more conservatively.

That decision strengthened provisioning reserves but came at a direct cost to earnings.

Onyutta’s own message reinforces this. He noted that the institution chose careful stewardship over short term gains, strengthening credit assessment in response to economic tightening, currency volatility, and pressure on low income households.

This was, in essence, a year where prudence outweighed profitability.

The balance sheet reflects this cautious positioning.

Total assets declined by 3.3 percent from UGX 236.76 billion in 2024 to UGX 228.98 billion in 2025, largely due to a drop in deposits with other financial institutions, which fell from UGX 44.16 billion to UGX 35.50 billion.

At the same time, government securities declined significantly, while other assets and intangible assets also reduced.

Although cash and bank balances and property and equipment recorded slight increases, the overall picture is one of a balance sheet being repositioned rather than aggressively expanded.

Funding dynamics also shifted.

Customer deposits declined from UGX 130.01 billion to UGX 126.54 billion, while debt securities in issue also fell.

At the same time, some liabilities increased, including other liabilities and provisions, reflecting operational and risk related adjustments.

Overall, total liabilities declined, but the drop in profitability meant this did not translate into improved shareholder value.

A profitability reset driven by prudence

Indeed, total shareholders’ equity fell by 5 percent from UGX 56.82 billion to UGX 53.77 billion, with no dividend declared in 2025 compared to UGX 2.38 billion the previous year.

Interestingly, asset quality indicators showed improvement.

Non performing loans declined, interest in suspense fell, and bad debts written off reduced, while PAR over 30 days improved to 4.53 percent.

This presents a clear contradiction.

Operationally, collections and loan quality metrics improved. But accounting provisions increased significantly under a more conservative risk model.

This is where the story comes together.

FINCA Uganda did not move into loss because the loan book deteriorated visibly. It moved into loss because it chose to recognise future risk more aggressively.

Despite the earnings setback, operational progress continued.

Digital channels now handle 70 percent of transactions, with 14,820 active digital borrowers and 93,731 active savers, while women account for 46 percent of borrowers.

At the same time, capital strength remained intact.

Core capital rose, total qualifying capital increased, and capital adequacy ratios improved, leaving the institution well capitalised despite the loss.

Put simply, five forces explain the reversal.

Interest income declined. Funding costs increased. Net operating income weakened. Operating expenses rose. And impairment charges surged sharply under a more conservative provisioning framework.

That is the line by line logic behind the loss.

FINCA Uganda’s 2025 performance is best understood not as a collapse in business activity, but as a profitability reset driven by prudence.

The institution continued to grow lending, improve credit metrics, expand digital usage, and strengthen capital buffers.

But it also accepted lower earnings in order to build a more resilient balance sheet.

The key question now is whether this was a one off year of balance sheet strengthening or the beginning of a more sustained pressure on profitability in Uganda’s low income lending segment.

For now, the numbers point to a clear conclusion. FINCA Uganda did not lose momentum. It chose caution, and that caution came at a cost.