islamic finance is well settled as a mode of operation, with already living examples, there is no consensus view on the role of islamic finance on price and financial stability. on the financial stability side, although there has been a wide consensus that the establishment of a powerful regulation and supervision system is vital to resume financial stability, there are contradictory views on the support of the islamic financial institutions to financial stability. on the other hand, the role of islamic finance on price stability has not been fully covered by the recent empirical studies. the views supporting islamic finance state that islamic financial institutions are more resilient to external shocks. profit and loss sharing feature of the transactions in islamic finance provides a protection to these institutions, apart from the capital. this feature of the islamic financial institutions could transfer a negative shock on the asset side to the liability side. furthermore, due to the fact that the investors ( depositors ) take on some part of the risk and do not have deposit insurance, they have more incentives to exercise tight oversight over these institutions. in addition, as compared to conventional banks, they have held a comparatively larger share of their assets in reserve accounts for the liquidity management. thus, even if islamic financial institutions have risky investments, these buffers make them more resilient to the negative external shocks. on the other hand, the opposing views claim that islamic finance does not need to improve the financial stability. according to this view, profit and loss sharing feature of islamic finance transfers the credit risk from islamic institutions to their depositors, and therefore, motivates the excessive risk taking incentive of islamic banks. while capital value and earnings of customers are not guaranteed in islamic finance, this feature may increase moral hazard and motivation for excessive risk taking without adequate capital. during the recent financial crisis, islamic financial institutions have demonstrated significant resilience. they have been less affected compared to the conventional financial institutions thanks to prohibitions on excessive leverage. the transfer of risks related with the debt is prohibited in islamic finance. therefore speculative transactions such as derivative are nonexistent. transferring the risk related with the debt and speculative financial activities could cause unnecessary booming of the financial transaction volume well above the size of the real economy. moreover, linking credit supply to growth rate of the economic activity, islamic finance acts as a natural hedging scheme. in other words, financing extended by means of islamic institutions can be used only with the real economic activity, and thereby, help restrict excessive credit boom. credit is mainly extended for the

erdem basci : commodity price volatility speech by mr erdem basci, governor of the central bank of the republic of turkey, at the “ g - 20 commodity price volatility conference ”, istanbul, 13 september 2011. * * * dear colleagues and distinguished guests, today i will discuss commodity price volatility, a topic which has vital importance for the global economy and thus for policy makers. in my speech, i would first like to discuss the possible sources of commodity price movements and then elaborate on the approach of the central bank of turkey in dealing with commodity price changes in the past few years. commodity markets cover a wide range of raw materials such as oil, metal and agricultural products. these commodities have different characteristics not only in terms of trade volume, supply and demand structure but also in terms of their exposure to financial market transactions. understanding the sources of the volatility in prices is essential in order to give appropriate policy response. the challenges posed by high and volatile commodity prices are important worldwide, yet they are more immediate for emerging markets. for instance, the share of food in the typical consumption basket is higher in these economies than in advanced economies. the average weights of food in the consumer price index in emerging market countries and in developed countries are around 30 % and 13 % respectively. besides, especially for the net importers of commodities, high and volatile prices pose significant risks on balance of payments and sustainability of growth in developing countries. there are nominal and real factors that affect commodity price developments. the most important real factor is due to the low price elasticity of not only supply of but also demand for these items. because of low elasticity, a minor change in supply has the potential to affect market prices significantly. likewise, a minor change in future real growth prospects has the effect of shifting the demand with a potential of large market price changes. this explains the real sources of commodity price volatility which is recently observed. regarding nominal sources of volatility, most commonly cited explanations are related to monetary policies of major central banks and the structure of financial markets in commodities. i will elaborate more on real factors that is the lack of sufficient real supply increase in order to meet booming real demand from the developing world. the high growth potential in developing countries suggests that demand pressures are likely to stay with us over the years to come. combined with the massive financial flows fueled by the exceptionally loose monetary policies, commodity price volatility will probably remain as a major