Islamic finance dispute resolution has become an increasingly important component of Banking & Finance Disputes as Sharia compliant financial products continue to grow across the UAE and wider GCC markets. Islamic banking structures such as murabaha, ijara, mudaraba, musharaka, tawarruq and sukuk are governed not only by commercial contract law but also by Sharia principles that require fairness, transparency, real asset backing and the avoidance of riba. When disputes arise, tribunals must reconcile contractual obligations with Sharia standards, regulatory frameworks and the expectations of parties who may rely heavily on the religious validity of the transaction. Because Islamic finance often involves multi layered documentation and complex asset flows, disputes frequently centre on enforceability, compliance, default remedies, profit calculations and the treatment of underlying assets. Understanding how UAE courts and arbitral tribunals approach these issues is essential for Islamic banks, corporates, investors and family offices engaging in Sharia compliant finance.
Islamic finance disputes commonly arise when parties disagree about profit payments, default remedies, asset ownership, Sharia compliance or the interpretation of the contract’s underlying structure. The unique nature of these contracts, which rely on trade, leasing or profit sharing rather than interest based lending, means courts must analyse both form and substance. Disputes often involve claims that a contract lacks genuine asset transfer, contains hidden riba or fails to meet Sharia governance standards.
Several transaction types regularly give rise to litigation or arbitration.
Murabaha structures involve a bank purchasing an asset and selling it to the customer at a marked up price. Disputes often focus on whether asset ownership genuinely transferred to the bank, the validity of profit calculations or whether the customer default triggered acceleration clauses consistent with Sharia principles.
Ijara agreements require the bank to remain owner of the leased asset. Conflicts arise over maintenance obligations, insurance, late payment penalties or end of term purchase options. Courts frequently examine whether the lease genuinely qualifies as Sharia compliant or if it resembles an interest based loan.
Profit sharing arrangements can become contentious when parties disagree over profit distribution, management responsibilities or loss allocation. Because these structures rely heavily on trust and partnership principles, poor documentation or ambiguous provisions often trigger disputes.
Tawarruq structures may be challenged if parties allege that the commodity trades were purely formalistic and lacked real economic substance. Courts examine whether trades occurred, whether brokers were independent and whether the structure complied with applicable Sharia standards.
Sharia supervisory boards play a central role in certifying product structures, but their opinions do not necessarily bind courts. Litigation often explores whether parties relied on Sharia board approvals, whether those approvals were accurate and whether the underlying transaction deviated from the certified structure. Strong Sharia governance and audit trails are essential to defending product validity.
The UAE permits Islamic finance disputes to be resolved through courts or arbitration. Onshore courts apply federal commercial laws while giving weight to Sharia principles where applicable. DIFC and ADGM courts, operating under common law systems, enforce Islamic finance contracts based on their commercial terms, supplemented by expert evidence on Sharia compliance. Arbitration is frequently preferred because parties can appoint tribunals with Islamic finance expertise.
Enforcement challenges arise when contracts include clauses that resemble interest based penalties or contradict Sharia doctrines. Courts may modify unenforceable provisions or recharacterise the contract based on substance rather than form. Sukuk defaults also present challenges, particularly where asset ownership, trust structures or security interests are contested.
Islamic finance disputes often require expert testimony from Sharia scholars or specialists in Islamic banking. Experts help clarify whether the structure complies with recognised Sharia standards, whether profit mechanisms are valid and whether default remedies meet religious and legal requirements. Documentary evidence such as Sharia board certificates, transaction flows and asset records are essential in proving compliance.
Mediation and arbitration are common pathways for resolving Islamic finance disputes due to confidentiality, flexibility and the ability to tailor proceedings to religious and commercial considerations. Institutions such as DIAC, DIFC LCIA and ADGM accept Sharia related disputes, and tribunals can incorporate both commercial expertise and Islamic jurisprudence where required.
Islamic finance dispute resolution is a nuanced and evolving field that requires a sophisticated blend of commercial law, regulatory understanding and Sharia principles. Whether disputes arise from murabaha, ijara, mudaraba, musharaka or sukuk structures, successful resolution depends on clear documentation, robust Sharia governance and specialist expertise. As Islamic finance continues to expand in the UAE and globally, effective dispute resolution remains vital to maintaining market confidence and safeguarding compliant financial innovation.
