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A trader changes dollars with naira at a currency exchange store in Lagos, Nigeria. An almost 40 per cent devaluation of the naira against the U.S. dollar in June has failed to rectify severe shortages of foreign exchange.

Joe Penney/Reuters

Bad loans in Nigeria's banking system have soared to more than double the limit set by the country's regulator as the industry struggles with an economic downturn.

The Abuja-based Central Bank of Nigeria, which requires the country's financial institutions to keep the ratio of non-performing loans to total credit below five per cent, reported via its website that the ratio has risen to 11.7 per cent at the end of June from 5.3 per cent at the end of 2015.

"Credit risk is expected to trend higher into the second half of 2016 owing to increased loan impairments resulting from the depreciation of the naira," the bank said, adding that the inability of debtors to service foreign currency-denominated loans and bank exposures to the oil and gas sector were also contributing factors.

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An almost 40 per cent devaluation of the naira against the U.S. dollar in June has failed to rectify severe shortages of foreign exchange. Gross domestic product is set to shrink 1.7 per cent this year, according to the International Monetary Fund, which would be the first full-year recession since 1991.

First Bank of Nigeria Ltd., the country's biggest lender by assets, has been one of the worst hit. Its non-performing loan ratio increased to 23 per cent at the end of June from 4.1 per cent a year earlier.

Capital levels have also decreased. The sector's capital adequacy ratio fell to 14.7 per cent in June from 16.1 per cent in December. For big banks, which the regulator classifies as having more than 1 trillion naira ($4.19-billion) of assets, that fell to 15.65 per cent, still above the requirement of 15 per cent.

"The Nigerian financial system remains stable and resilient in spite of prevailing macroeconomic challenges," Central Bank Governor Godwin Emefiele said in the report. "The central bank will continue to focus on its main objective of maintaining price and financial system stability."

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