A reserve that is created by an Islamic bank by appropriating a specific amount out of the mudaraba income, before allocating the share of mudarib. By so doing, the bank aims to maintain a certain level of return on investment to the benefit of its investment account holders and equity owners.
The optimal amount of a profit equalization reserve is defined as that considered prudent by the management of the bank taking into account the interest of both investment account holders and shareholders. At the end of a given financial year or period, the amount required to top off the balance of the reserve will be treated as an appropriation of income before the mudarib receives its share. If the balance exceeds the optimal amount, then the excess amount shall be debited from the reserve balance and simultaneously credited to a respective party’s share of income relative to the relevant financial period before the mudarib receives its share.
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