Displaced Commercial Risk (DCR)

Displaced Commercial Risk (DCR) occurs when realized rate of return was lower than the expected rate of return.

It is considered as a potential loss that occurs when shareholder funds are utilized to smooth rate of return on Islamic deposits.

With this, there is a potentiality that clients might switch from Islamic deposits to conventional deposits especially in dual banking system. 

To prevent a migration of the deposits, Islamic Bank will pay the deficit using its own fund. This will decline total earning of the bank. 

For a better understanding, it can be referred to the below diagram:

 

Rate of return risk refers to a potential loss arising from loss of deposit, when there was a mismatch in asset and liability. In other words, it happens when the actual rate of return was lower than the expected rate of return.

Profit equalization reserve is the amount appropriated from total income with the purpose to maintain an acceptable level of return on Islamic deposits.