(i) Undercapitalisation, where a bank’s capital adequacy ratio (CAR) falls below the regulatory minimum (typically 10% under Bank of Ghana’s Capital Requirements Directive, aligned with Basel III), severely undermines corporate governance structures and processes. In the context of Virtualbank Plc, with negative CAR due to Credit Risk Reserve exceeding Paid-Up Capital, negative Statutory Reserves, and persistent negative PAT exacerbated by increasing negative OCI, this situation erodes the bank’s ability to absorb losses, comply with regulations, and maintain stakeholder confidence. Drawing from my 20+ years in Ghanaian banking, including roles in risk management at institutions like Ecobank Ghana during the 2017-2019 cleanup, undercapitalisation affects corporate governance in several critical ways, as outlined below.

• Impaired Board Oversight and Decision-Making: The board’s fiduciary duty under the Banks and Specialised Deposit-Taking Institutions Act, 2016 (Act 930) and the Corporate Governance Directive 2018 requires proactive risk management and strategic planning. Undercapitalisation limits the board’s ability to approve new investments or expansions, forcing reactive decisions like asset sales or cost-cutting that may conflict with long-term strategy. For instance, during the Ghanaian banking cleanup, boards of undercapitalised banks like UT Bank faced scrutiny for delayed interventions, leading to license revocations. At Virtualbank, concentrated key customers and branch networks become vulnerabilities if the board cannot fund digital enhancements, risking governance failures in stakeholder value maximization under the Shareholder Model.
• Weakened Risk Management and Internal Controls: Corporate governance relies on robust Enterprise-Wide Risk Management (EWRM) frameworks. Negative capital erodes buffers against credit, market, and operational risks, as seen in Virtualbank’s high CRR indicating provisioning shortfalls. This pressures the Risk Committee to under-report risks to avoid regulatory sanctions, breaching transparency principles in the Basel Recommendations adapted by BoG. Historical examples include Capital Bank’s collapse due to governance lapses in risk modeling, where undercapitalisation hid non-performing loans. Virtualbank’s negative OCI suggests unrealized losses (e.g., from DDEP impacts post-2022), compromising audit integrity and board assurance functions.
• Regulatory Compliance and Forbearance Dependencies: Undercapitalisation invites heightened BoG scrutiny under Notice No. BG/GOV/SEC/2023/05 on recapitalization, potentially leading to forbearance (e.g., 4-year resolution periods) but with strings like restricted dividends or lending. This shifts governance from autonomous to regulator-driven, diluting board independence. In practice, boards must navigate Act 930’s fit-and-proper criteria, risking director disqualifications if perceived as ineffective. Global parallels like Enron or local cases like Meridian BIAO highlight how capital shortfalls foster non-compliance, eroding public trust and inviting bailouts with tax implications.
• Stakeholder Conflicts and Ethical Dilemmas: Under the Stakeholder Model and Triple Bottom Line, undercapitalisation strains relationships with depositors, shareholders, and employees. Negative PAT may lead to delayed salaries or layoffs, breaching ethical codes on fiduciary responsibility and prudence. The board, led by Dr. Nathalie Abs-Oesi, faces conflicts if personal interests (e.g., executive pay) clash with recapitalization needs, violating BoG’s directives on conflicts of interest. In Ghana, post-DDEP recovery saw banks like Access Bank Ghana prioritize ethical transparency to rebuild confidence, whereas failures led to systemic destabilization.
• Financial Reporting and Disclosure Challenges: IFRS mandates (e.g., IAS 1 on going concern) require transparent disclosures, but undercapitalisation tempts window-dressing, undermining governance. Virtualbank’s unaudited mid-year statements risk qualified audits if OCI losses are not fully disclosed, echoing WorldCom’s failures. The board’s Audit Committee must ensure voluntary disclosures to maintain market confidence, but capital constraints limit resources for compliance.
• Operational and Reputational Risks: With strengths in physical branches and digital channels for SMEs, undercapitalisation hampers IT investments, exposing cyber risks under the Cyber and Information Security Directive 2020. This weakens governance in operational resilience, potentially leading to reputational damage akin to Ecobank’s past data breaches. Overall, it fosters a culture of short-termism, contradicting ethical leadership in the Code of Ethics for Banking.

In summary, undercapitalisation at Virtualbank fundamentally weakens board effectiveness, risk oversight, compliance, and ethical standards, potentially leading to systemic failures if unaddressed.

(ii) To recapitalise and achieve high-performing status, the Virtualbank Board must leverage regulatory forbearances (e.g., 4-year window) while implementing practical, BoG-approved measures. Based on experiences like GCB Bank’s post-cleanup recapitalization, key steps include:

• Equity Injection via Rights Issues or Private Placements: Issue new shares to existing shareholders or strategic investors, targeting GH¢400 million minimum under Act 930. Board should engage SEC for approvals, using strengths in SME digital channels to attract fintech partners.
• Asset Optimization and Restructuring: Sell non-core assets (e.g., underutilized branches) and restructure balance sheet by converting debt to equity. Implement liquidity guidelines to reduce liability duration mismatches.
• Cost Management and Efficiency Drives: Cut operational costs (e.g., digitize branches) without layoffs, aiming for positive PAT. Board to monitor via KPIs like ROE >15% for high performance.
• Regulatory Engagement and Forbearance Utilization: Negotiate with BoG for extended timelines, ensuring compliance reporting. Diversify from concentrated customers to build resilience.
• Strategic Partnerships and Mergers: Explore mergers with healthier peers, as in Stanbic-IBG merger, to boost capital and digital capabilities.

These measures, if executed with strong governance, can restore CAR above 13% (BoG’s prudential buffer) and position Virtualbank as high-performing.