Profit allocation (investment accounts)
The method for dividing a pool's income between the bank and investment account holders, including reserves and weightages.
Profit allocation is the process by which an Islamic bank calculates the income of an investment pool and divides it between the bank, as mudarib or agent, and investment account holders. It involves attributing income and expenses to the pool, applying the agreed profit sharing ratios and any weightages between account types, and making appropriations to reserves. IFSB-22 calls for disclosure of these methods so that account holders can understand how their returns were determined.
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 sharing ratioThe agreed split of profit between partners, expressed as a ratio of actual profit, never as a fixed sum or a share of capital.Investment poolA group of assets funded by identified sources, such as shareholders or investment account holders, whose income is allocated to them.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.