 In this module, we shall further investigate the profit sharing investment accounts based on Mudarba. In our previous segment, we mentioned that there are two types of PSIAs, unrestricted and restricted. And our focus in a way in the previous segment was on the restricted profit sharing investment accounts. In this one, we would be using unrestricted profit sharing investment accounts as an example. Unrestricted profit sharing investment accounts offer greater flexibility to the bank management. In case of restricted profit sharing investment accounts, the banks have to make the business activity in which the money is going to be invested known to the people and to the regulators. In case of unrestricted, this restriction is not there, rather there is a lot of flexibility as long as the money used by the bank is in the legitimate i.e. Asharia compliant activity. In this module, we shall also be explaining the concept of profit smoothing in a bit more detail. In the previous segment, we mentioned about this one, but we are going to investigate it even further. Without going into all the details which we went through in the previous segment, I would be telling you that the bank offers the unrestricted profit sharing investment accounts to the general public. The terms and conditions are made known to them. The general public is made aware of the fact that the money collected through unrestricted profit sharing investment accounts would be used in any legitimate financing activity. The bank of course offers a tentative rate of return to those who would be putting their money into unrestricted profit sharing investment accounts. After understanding the terms and conditions, the general public, individuals, they open their accounts with the banks, the money thus collected by the bank from the unrestricted profit sharing investment accounts is put into a Mudarabha pool and of course this money is then used for general banking activities with a view to generate some profit. Distribution of profit amongst the account holders is almost the same as in case of our previous example, the profit is distributed on a pro-rata basis amongst the holders of unrestricted profit sharing investment accounts as per the agreed and publicly made available profit distribution ratio. And of course if there is a loss, that loss is borne by the providers of the capital. However, we would see that with the help of profit smoothing, Islamic banks ensure that profit takes place and if there is excess profit that is put into an excess reserve or a couple of them and in case of a loss, those reserves are then accessed to make sure that the investors receive the indicative rate of return. Let us see this with the help of an example which is very similar to what we used in our previous module. So this one individual puts $1 into an unrestricted profit sharing investment account. Of course there are thousands of other people who have contributed to this Mudarabha pool through unrestricted profit sharing investment accounts. So there is $1 billion into the Mudarabha pool out of which $100 million is contributed by the shareholders of the bank and the remaining $900,000 that actually comes from the investment account holders. Now this $1 billion amount of money is used for various financing activities undertaken by the bank and if there is a profit say in this case there is $250 million worth of profit that is actually the profit generated by the Mudarabha pool which is equivalent to 25%. So this is for all those who have contributed into the Mudarabha pool both the unrestricted profit sharing investment account holders as well as the shareholders of the bank. Now this $250 million would be distributed between the bank and the unrestricted profit sharing investment account holders. So this $50-50 this is the profit distribution ratio $125 million would be the bank share and $125 million would be the share of the unrestricted profit sharing investment account holders which generates a rate of return of 13.88% a lot more than the indicative rate of return of 10%. In this case the bank would be putting $35 million into the investment risk reserve and the remaining $90 million would be distributed amongst the unrestricted profit sharing investment account holders which is equal to the indicative rate of return of 10%. In some jurisdictions or in some banks not just one reserve is maintained for profit smoothening rather they maintain two reserves one is called profit equalization reserve and the other one is called investment risk reserve. Now in case of a $250 million profit if the bank is maintaining two reserves bank share is $125 million so that would go to the bank $25 million would go into a profit equalization reserve and this would leave us with the share of the unrestricted profit sharing investment accounts of $90 million out of which $10 million would be put into investment risk reserve and the $90 million this is the amount which would generate a rate of return of 10% which is equal to the indicative rate of return. So in this case there are two reserves one is a profit equalization reserve the other one is an investment risk reserve. Now if in a subsequent period period two the profit generated by the activities was $150 million bank share would be of course $75 million and unrestricted profit sharing investment account holders their share would be 50% of the profit which is $75 million which is less than the indicative rate of return of 10% return to the account holders. So this would generate a return of only 8.33% to make sure that the investment account holders receive 10% return the profit equalization reserve would be accessed from their $5 million would come and the $10 million would come from investment risk reserve that would make the distributable profit of $90 million amongst the unrestricted profit sharing investment account holders which is actually equivalent to the 10% indicative rate of return. Now who owns profit equalization reserve and the money in investment risk reserve? The funds in IRR belong to the unrestricted profit sharing investment account holders because the money is actually put into the reserve from their share of the profit. The fund in the profit equalization reserve belong to the shareholders and unrestricted profit sharing investment account holders because the money going into the PER profit equalization reserve actually goes into the reserve before that profit is distributed between the bank and the unrestricted profit sharing investment account holders. So from regulatory viewpoint i.e. from the viewpoint of regulator i.e. in case of Pakistan state bank of Pakistan or other central banks it is absolutely important that ethical side of the business remains intact. If the bank is putting money from the profit pool into this reserve into that reserve then it should be determined actually who owns the money into these reserves and in case of distribution of money from those pools it should go to the rightful owners in accordance with their shares.