Profit equalisation reserve
An amount set aside from mudarabah income to maintain a level of return for investment account holders and the bank over time.
The profit equalisation reserve is the amount appropriated out of mudarabah profits in order to maintain a certain level of return on investment for the mudarib and unrestricted investment account holders, in the IFSB-23 definition. IFSB-30 notes that it is appropriated before the mudarib's share is allocated. It smooths returns across periods, so its policy and any transfers must be disclosed to account holders.
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
Investment risk reserveAn amount set aside from investment account holders' profit, after the bank's share, to cushion their future investment losses.Displaced commercial riskPressure on an Islamic bank to give up part of its own profit so investment account holders earn a competitive return.Unrestricted investment accountAn investment account whose funds the bank may invest at its discretion and commingle with its own in a pooled portfolio.Profit allocation (investment accounts)The method for dividing a pool's income between the bank and investment account holders, including reserves and weightages.