An investment risk reserve is a reserve built up by an Islamic bank out of the income attributable to its investment account holders, after the bank has taken its own share as manager. Its purpose is to cover losses that may later arise on the assets financed with those holders' funds. Investment accounts are generally based on mudarabah, under which the account holders, as providers of capital, bear investment losses, and the reserve softens that exposure.
It is distinct from the profit equalisation reserve, which is appropriated before the bank's share is deducted and is used to smooth the rate of return paid from year to year. Because the investment risk reserve is taken wholly from the account holders' portion, it belongs to them collectively, though holders who withdraw give up their claim to it. Standards of AAOIFI and the Islamic Financial Services Board address its disclosure and treatment.