This article deals with Gurraacha institution, which is very important in inter-ethnic peace building and resolving conflict among people of south-central Ethiopia. This institution was named after the Oromo term ‘Gurraacha’ (literally meaning black) to indicate its power in inter-ethnic peace building and conflict resolution. It is one element of Oromo Gadaa system which was established time immemorial to sustain peace between Oromo and non-Oromo neighboring ethnic groups. The data for this study was collected through interview, observation and focus group discussions in 2014 and 2015. As revealed by this study, Gurraacha institution is a guarantee for sustaining peace among people of south-central Ethiopia by managing conflict over boundary, grazing land, looting of cattle and water points. Overall, the study concluded that Gurraacha institution has real significance in inter-ethnic peace-building, sustaining social harmony and inter-ethnic conflict resolution. In Gurraacha institution, people rebuild lost peace and order of Waaqa (God) by performing purification rituals. There is no corruption in Gurraacha institution since all activities are undertaken according to Waaqa’s law and order. There is no false oath in this institution because such act is believed to have negative consequences. The oath of Gurraacha institution which are made during reconciliation process transcend generations. This institution is the model of conflict transformation which is hardly found in today’s world. Therefore, using this indigenous institution for future policy formulation in the country as inter-ethnic peace building and conflict resolution model is important for the realization of sustainable peace and development.