Investment risk reserve
An amount set aside from investment account holders' profit, after the bank's share, to cushion their future investment losses.
The investment risk reserve is the amount appropriated out of the profit of investment account holders, after allocating the mudarib's share, to cushion against future investment losses for those holders, as IFSB-23 defines it. Unlike the profit equalisation reserve, it comes only from the account holders' share and exists to absorb losses rather than to smooth returns. AAOIFI's accounting standard on risk reserves addresses how it is reported.
Sources
This entry explains a term; it is not a Shariah ruling. Approving a product is for each institution's own Shariah board and regulator.
Related terms
Profit equalisation reserveAn amount set aside from mudarabah income to maintain a level of return for investment account holders and the bank over time.Investment account holderA customer who places funds in an investment account and shares in its returns and risks, rather than holding a deposit claim.Profit allocation (investment accounts)The method for dividing a pool's income between the bank and investment account holders, including reserves and weightages.