What is the present status of Islamic Government? And why is the legitimacy of Islam as a state religion such a controversial matter for all of the world to presently debate? It would seem that state sponsored religion is an archaic construct which has been for the most part abandoned by modern government. But in fact this is far from the truth, the truth is that several sovereign nations have recognized a particular religion as their state or official religion. I think non-Muslims need to answer why is Islam in particular, as a state religion, such a big deal? As for Muslims I think we must ask ourselves are we implementing Islam in government the way it was intended? Or are there implementations of Islam in modern government that are a bid'ah?
Innovations in Islam:
Before we look into some of these questions I would like to briefly explain, to the best of my ability, what bid'ah is. Bid'ah is an Arabic word derived from the root word bada'ah, which literally means 'a new thing without precedence'. Attributive name of God, Al-Badi is also derived from the same root to denote God as the Creator of things that had no previous existence. For example, in the Qur'an it says,
"badi usamawaati wal 'ard"
This means, the Creator of the Heavens and Earth (out of nothing). This example is to reflect that there are no inherent, negative connotations in its normal usage. But as a technical and legal word it refers to an addition to the religion that was not known or practiced at the time of the Prophet (s.a.w.s.).
It should also be noted that socially, the word bid'ah has developed into an Muslim epithet which typically expresses a nominal heresy. But if we look to the primary source of knowledge in the Qur'an we can see that there are in fact permissible bid'ah as well as impermissible bid'ah. God makes mention of this in chapter 57, suratul-hadid, verse 16 saying:
"But the Monasticism which they invented for themselves, We did not prescribe for them: (We commanded) only the seeking for the Good Pleasure of Allah; but that they did not foster as they should have done. Yet We bestowed, on those among them who believed, their (due) reward, but many
of them are rebellious transgressors." (57:027)
This verse tells us that the followers of Jesus - 'Isa (a.s.) - instituted monasticism after he left the Earth as a new practice, a bid'ah. It is not condemned by God, but we are instructed that they did not cultivate what they should have. Dr. Zahid Iqbal suggests that this is a clear testament that contains an implied permission granted for this new practice (bid'ah), though they failed in its proper care. 
Also, I recall a sahih hadith which narrated by Abu Huraira, where he says that after the Prophets death (s.a.w.s.), during the Caliphate of Abu Bakr (r.a.) and in the early days of 'Umar's bin al-Khattab's Caliphate (r.a.) that one would find people praying in different groups. And 'Abdur Rahman bin 'Abdul Qari said,
"I went out in the company of 'Umar bin Al-Khattab one night in Ramadan to the mosque and found the people praying in different groups. A man praying alone or a man praying with a little group behind him. So, 'Umar said, 'In my opinion I would better collect these (people) under the leadership of one Qari (Reciter) (i.e. let them pray in congregation!)'. So, he made up his mind to congregate them behind Ubai bin Ka'b. Then on another night I went again in his company and the people were praying behind their reciter. On that, 'Umar remarked, 'What an excellent Bid'a (i.e. innovation in religion) this is; but the prayer which they do not perform, but sleep at its time is better than the one they are offering.' He meant the prayer in the last part of the night. (In those days) people used to pray in the early part of the night." 
Therefore, it should be noted that there are in fact permissible and impermissible bid'ah in Islam. But who determines what a permissible bid'ah is? For example, are the secular courts of the Muslim World bid'ah? Likewise are there components of government that rule the Muslim World in way that are a bid'ah? What I am questioning here is possibility of impermissible bid'ah in government. But in order to assess this someone from an authoritative legal position has to define what a permissible and an impermissible bid'ah. But can this be done with the Gate of ijtihad closed? So lets examine more closely authority in Islam.
Competition for Legitimate Authority:
After the death of the Prophet (s.a.w.s.), the first caliph Abu Bakr (r.a.) (d. 13/634) became engulfed in civil war. The second, 'Umar b. al-Khattab (d. 23/644) and third, 'Uthman b. 'Affan (d. 35/656) caliphs were assassinated and the fourth, 'Ali b. Abi Talib (d. 40/661) faced a number of rebellions and was likewise assassinated. These rebellions had underlying socio-economic problems which reflected the emergent state of a legitimate authority. Soon there became a competition between the Prophet's tribe, the Quraysh, the Prophet's family, his close friends and companions, anyone and the Muslim community as a whole. But by the end of this competition only one had shown to be qualified as a "coherent" and "systematic" authority of the religion. That authority was the Law of God, as relayed by the jurists, a specialized group of professionals, who developed institutions, guilds and technical methods for implementing legal rulings based on the Qur'an and Sunnah (traditions of the Prophet). 
Islamic Schools of Thought:
These guilds and institutions developed into four main schools of Sunni Islam, one main and three minor schools of Shi'a Islam and several extinct schools. These schools became very competitive in nature are overtime various leaders, state officials and/or whole communities designated to follow one or another.
The schools developed law guilds with a hierarchal structure that functioned independent of governments. Jurists would however, often find work as a state officials in the judiciary, in service to the state and the people, while remaining loyal to their respective guild. On the other hand jurists often refused governmental positions, to the chagrin of governors, emirs and caliphs, to pursue independent study or teaching in the guild itself. Some jurists were severely persecuted for refusing official positions. It should be of note that these law guilds remained independent of government and state leadership and financing. Their relationship resulted in a way that is not dissimilar to the checks-and-balances system of American democracy. And the reason for this is simple. Their power was rooted in the fact that they could formidably argue that the ruler and the ruled were normatively bound by God's law and thus equals in certain terms. This meant that these school defended the law of God which implies despite ones ethnic grouping, financial status and/or birth all are as equals as the legitimate recipients of God's mercies and punishments. This is not far from our American values of liberal freedoms and We the People being the benefactors of inaliable rights of freedom and justice. Modern Islamic Jurist, Khaled Abou-El Fadl has discussed how jurists characterized legitimate and illegitimate governments when he writes,
"the jurists distinguished between a legitimate Islamic government (caliphate) and other forms of government by the fact that an Islamic government is based and bound by Shari'ah law while other governments are based on whimsical despotism (hawa). Furthermore, Muslim jurists often espoused legal doctrines that were restrictive of the discretionary powers of rulers. For example, the jurists argued that the rights of human beings (huquq al-adamiyyin) are retained exclusively by human beings, and that rulers have no power of dispensation over such rights."
The Disintegration of the Islamic Legal System:
There are a number of opinions on the conditions of the present day Islamic legal system but I think Abou El Fadl sums it up poignantly when he wrote,
"There are a variety of reasons for the disintegration of the traditional dynamics of Islamic jurisprudence. Primary among those reasons is the increasing centralization of state power, the nationalization of the private endowments (awqaf) that supported and funded the law guilds, the withering away of law guilds and their replacement with state-owned secular law schools, the adoption of the civil law system into a large number of Muslim countries, the development of enormous hegemonic state bureaucracies that co-opted and transformed many jurists into salaried employees, and the experience of colonialism that often methodically dismantled the traditional institutions of Islamic law under the guise of the imperative of modernization." 
He goes on to add something of great importance noting,
"It is difficult to assess whether this process started with the centralized structure of the Ottoman Empire, or the increasing reliance on qunun (secular positive law) and faramans (edicts) as the main legislative mechanism of the Ottoman rulers. But there is no doubt that the movement to dismantle the traditional mechanisms of Islamic law were given a great momentum in the age of colonialism and in the post-colonial age with the emergence of what Amos Perlmutter called the praetorian state in many Muslim countries." 
The Problem and the Solution:
Its clear that one of the problems concerning Muslims is authority in other words Muslim leadership and the Islamic authenticity of that leadership. Abou El Fadl gave us a degree of insight into the primary sources of this disintegration of Muslim leaders and authentic Islamic authority. But if this is the problem what is the solution? Is the solution something that the West can assist with or is the West the protagonist of the problem? 'Throughout the classical period Muslim jurists played a rather dynamic negotiative role in society. The often acted as a medium between the various social structures and political structures. The were at times allied to the interests and concerns of one to the other. Which is why Abou El Fadl describes classic juristic culture in traditional Islam was "semi-autonomous"'. 
Hamza Yusuf, arguably the America's most recognized Islamic scholar, weighed in on this issue during a 2003 lecture in Canada saying,
"What I think is important for Muslims today - especially the scholars - is to begin to look at our own legal tradition - and this is what I think Dr. Feldman [the notable U.S. Constitutional Lawyer and Professor at Harvard University Law] was saying in his book, [After Jihad: America and the Struggle for Islamic Democracy] - and begin to derive from their own tradition those things that will facilitate their movement into the modern world to be successful and productive members of an increasingly globalized community". 
Imam Hamza could have been a bit more precise in his analysis of the final solution to the problem Dr. Abou El Fadl mentions. But what he did do was to address where Muslims should concentrate in order to begin forward progress toward developing a sustainable sovereign society and also an integral faction of the modern world. I believe, like most if not all Muslims, that our religion provides a means for governing which guarantees our primary freedoms and inalienable human rights in a way that may in time surpass liberal democracy. But this can only become a reality if the institution of Islamic law can be implemented in its proper functional role, that being free from State control, authority by proxy or under the thumb of secular tyrants.
The present day reality we face, in spite of madness parading as Islam, is that we are seeing the unexpected results of covert activity gone wrong. Territorial partitions, power struggles in Palestine and Syria, puppet rulers and secret planning concerning the future of the Middle East by everyone but Middle Easterners is all to cyclic to be addressed as a new problem. The fact is that many of todays problems for Muslims have been a developing item that finds its origins in the Crusades.  I think that this will continue to be the state of affairs until Muslims redress disintegration of its leadership and authentic Islamic authority - by removing secular legal processes which are a type of bid'ah and impermissible - as a means to legislate and govern the greater body of Muslims across the Muslim world. Accomplish this of course after it is identified that an Islamic government is in fact what Muslims in the Muslim World want. And this can only be possible if the non-Muslim world can accept a sovereign Muslim government as a successful and productive member of this global community. But is this possible?
 Iqbal, The Concept of Bid'ah
 Bukhari, Book 32; Vol 3; 227
 Abou El Fadl, Speaking in God's Name, p. 11, 12
 Abou El Fadl, Speaking in God's Name, p. 16
 Abou El Fadl, Speaking in God's Name, p. 16
 Abou El Fadl, Speaking in God's Name, p. 15
 Yusuf, Islam & Democracy: Is a Clash of Civilizations Inevitable, 2003
 Ahmed, Islam Under Siege, p. 26, 27