SS 32 · General

SS 32: Arbitration

What this standard is about

Arbitration is an agreement between two or more parties to appoint an external party who resolves their dispute by issuing a binding verdict. This standard covers arbitration as practiced in financial transactions and other activities and relationships involving institutions — between institutions themselves, or between an institution and its clients, employees, or other parties, inside or outside the institution's home country. The arbitration it describes is Islamic arbitration, which observes the rules and conditions of Shariah.

Arbitration can be agreed when a dispute arises, agreed in advance through an arbitration clause in a contract, or imposed by law. It is binding when it is stipulated as a contract condition, or when the parties agree to arbitration and pledge to observe its verdicts. Some matters cannot be arbitrated: what constitutes a right of Allah, such as hudud (Shariah criminal penalties), and cases that would prove or disprove a verdict concerning a third party.

The verdict of a valid arbitration is binding on the parties on its own, without needing their later consent, and can only be set aside for contradicting Shariah or public order. The parties are expected to carry it out willingly; if one refuses, the other may take it to court for execution.

Why it exists

Disputes between banks and their customers or partners need a way to be settled that is consistent with Shariah. Without clear rules, parties may face rulings from arbitrators who do not apply Islamic law, or verdicts that cannot be enforced. The standard exists to give institutions a reliable, Shariah-observant arbitration framework that all sides can trust.

The key rules, simply put

Arbitration is permissible between natural persons, legal persons (companies and institutions), or a mix of both.
Arbitration is not allowed for a right of Allah, such as hudud penalties, nor for cases that decide a verdict affecting a third party. A verdict issued on a matter outside arbitration's scope is null and void.
An arbitrator must be fully eligible for the task. In principle he should be a Muslim. A non-Muslim may be appointed only in cases of acute need, and the verdict must still be acceptable under Shariah.
One or more arbitrators may be appointed, preferably an odd number. Each party may appoint its own arbitrator, and the arbitrators may appoint a final one if the parties permit. If one party refuses to appoint, the other may ask a court to appoint someone for them.
The arbitrator must apply the rulings of Shariah. Even if a particular law is imposed on him, he must not violate Shariah. Parties may set permissible limits, such as a time limit for the verdict or reference to a specific school of fiqh (Islamic jurisprudence).
Verbal arbitration agreements are valid, but institutions should document arbitration in writing. The verdict is issued by consensus or majority, signed by the panel members, and includes the parties' identities, the dispute summary, claims, evidence, and reasons for the decision.
The verdict is binding on the parties automatically, unless it contradicts Shariah or public order. It does not need witness attestation or court registration to be valid, though registration may be needed to enforce it.
The arbitrator may not retreat from his verdict unless he admits a mistake in it.

An everyday example

A customer disputes how an Islamic bank calculated profit on his mudarabah (profit-sharing) investment account. Their contract contains an arbitration clause naming a three-member panel of scholars. The panel hears both sides, reviews the documents, and issues a signed written verdict stating the correct amount. Both sides accept it, and the bank pays.

Words to know

Arbitration — settling a dispute through an appointed external party whose verdict binds both sides
Shariah — Islamic religious law
Hudud — the fixed Shariah penalties for certain criminal offenses
Fiqh — Islamic jurisprudence, the body of scholarly legal reasoning
Mudarabah — a partnership where one party provides capital and the other provides management

Source

AAOIFI Shariah Standard No. 32 — https://islamicmarkets.com/publications/arbitration-scope-of-standard