International Journal of Business Economics and Management Research Vol. 9, Issue 1, January 2018 Impact Factor: 4.963 ISSN: (2229-4848) www.skirec.org Email Id: skirec.org@gmail.com An International Double-Blind, Peer Reviewed, Refereed Open Access Journal - Included in the International Indexing Directories Page 25 THE IMPACT OF AMNESTIES ON NON-PERFORMING LOANS IN NORTHERN CYPRUS Okan Veli ŞAFAKLI European University of Lefke, Faculty of Economics and Administrative Sciences Department of Economics, Lefke, Northern Cyprus TR-10 Mersin, Turkey ABSTRACT The main aim of this study is to examine the impact of amnesties on non-performing loans (NPLs) in Northern Cyprus. The period in which amnesties were applied covers the years between 2012 and 2014. When the data before and after amnesties were considered it is determined that amnesties did create negative results due to moral hazard. It can be concluded that measures should concentrate on the causes of NPLs rather than amnesties in order to mitigate the problem of NPLs. These measures should consist of legal, institutional and administrative dimensions. KEYWORDS: Non-performing loans, Moral Hazard, Amnesties, Northern Cyprus INTRODUCTION The main role of the basic credit cycle, which transcends the economies of the countries, is played by the banks. The loan cycle is simple: customer deposits finance loans. Loans allow lenders, businesses, individuals, governments, non-profit-seekers and many others to grow and invest, thereby creating more jobs that cause economic growth and prosperity. The welfare created through wealth eventually goes back to the bank as deposits and the economic cycle reenergises (American Bankers Association, 2014). This state makes banks deposits and loans as the most important items of the balance sheet. For example, data about Turkish banking sector clearly reveals this. In the Turkish banking sector, the share of loans to total assets was 63% followed by securities (14%) and reserve requirements (8%). Deposits with 53% share have the biggest share in the total liabilities followed by interbank loans (16%) and repo (7%). Additionally, the share of equity capital in total liabilities is 11 percent (BDDK, 2016). As can be understood, the sustainability and destiny of commercial banks depend on the profitability of loans. Therefore, banks' main source of income comes from interest on loans even though banks started to earn substantial amounts of non-interest income for other financial services (DeYoung and Rice, 2014). Therefore sound credit risk management framework is crucial for banks in order to enhance profitability and guarantee survival (Kolapo et al. 2012).