It is important to understand that Islamic Financial system is quite different from the Western financial system. The standard financial system around the world is based on various principles revolving around interest, whereas Islamic financial system is against the interest, and the system is developed without keeping any interests in the contracts and other financial activities. That’s why Islamic financial system has developed Islamic financial contracts on the principles of Isla, guided by Quran and the Prophet Muhammad (PBUH). These contracts are off various kinds with different names like Murabaha, Mudarabah, Musharakah etc. The legal issues in murabaha system complies with the civil law; because there can be issues in the contractual laws. Civil laws are not favorable to the murabaha system because there are not benefits to the economy. There are issues related to the credit risks; as there are issues in the defaulting in the debt paying.

        From the profit-sharing modes; it is analyzed that credit risks can result in non-payment of the shares. Other issues of murabaha system can be related to the market risk, assets price risks, liquidity, operation and legal risk. However, the risks that are involved in Mudarabah system, can be related to the prohibition of financial interest; they could be in different forms. Other risks are related to the profit/loss that may be implies with the shariah rules. There could be avoidance of the irrational use of the capital funds. These contracts offer business and other partnerships between two or more than two parties and these contracts are followed as per the principles of Sharia laws. But the issue with all of these contracts is that they have various relevant legal and Sharia issues to be resolved. As mentioned above that interest or Riba is prohibited in the Islam, but legally it is hard for these contracts to remain distant from Riba or Interest. The overall financial system even in an Islamic country is also based on the western banking models, where interest is the main aspect in all financial activities. It means that Islamic fiancé has to deal with these legal issues and make things compliant to Islamic Sharia laws (Zandi 2012)

            The legal issues related with Murabaha contract are more related to the financial risks that one party may have to bear. This contract is more like an installment based system, and it is also one of the mostly used contracts in Islamic finance. The Murabaha contract comes with liquidity risks, where the lender may face issues in getting timely payment for the assets. There can be a situation, where a bank sends a commodity to the client, but client does not accept it due to any reasons. In this situation, the bank will remain in the risk until they find another client for the same commodity so that they can get some returns on their commodity. The other most important risk associated with Murabaha contract is credit risk. It means that there can be a situation, where a client may not be able to pay installments for the commodity lend from the bank. When due amount is not paid in a given time period, it enhances the level of liquidity risks for the bank. So, these are few legal issues and risks associated with the Murabaha contract of Islamic finance (Almohana 2017)

References of There are Shariah and legal issues in some Islamic Financial Contrast i.e Murabahah and Mudarabah contrasts. Analyze these legal issues by choosing any contract of your choice and explain it. 

Almohana, Mohammad. 2017. Legal Risks Faced By Investors in Dealing with Islamic Financial Transactions and Mitigation Actions/Strategies to Keep Off Legal Risks: The Case of Murabaha Transaction. University of Exeter.

Zandi, Gholamreza. 2012. "Some issues on Murabahah practices in Iran and Malaysian Islamic banks." African journal of business management 6 (24).