In this month's edition of Renaissance, the monthly English-language journal of Lahore's Al-Mawrid institute, Muzaffar K. Awan has a review of the democratic ideas of Muhammad Iqbal and the modern Turkish thinker Fethullah Gülen. Of Iqbal's view of democracy, Awan says:
"Iqbal [...] did not like the idea of importing the Western democratic system and transplanting it as such in the Islamic world because of its extreme secular stance. He still suggested in his writings that there was no alternative to democracy in the Muslim World. Iqbal observed that if the foundations of democracy were to rest upon spiritual and moral values, it would be the best political system for the world. He wrote in the "The New Era" July 28th, 1917 issue: "Democracy was born in Europe from economic renaissance that took place in most of its societies. But democracy in the Islamic context is not to be developed from the idea of economic advancement alone; it is also a spiritual principle that comes from the fact that every individual is a source of power whose potentialities are to be developed through virtue and character."
Gülen argues that democracy, whilst not perfect, is the best option available for political arrangements since it allows people to govern themselves; this he bases on the Qur'anic principle of individuals and societies being responsible for their own fate:
"As Islam holds individuals and societies responsible for their own fate, people must be responsible for governing themselves. The Qur’an addresses society with such phrases as: “O people!” and “O believers!” The duties entrusted to modern democratic system are those that Islam refers to society and classifies, in order of importance, as “absolutely necessary, relatively necessary, and commendable to carry out.” People cooperate with one another in sharing these duties and establishing the essential foundations necessary to perform them. The government is composed of all of these foundations. Thus, Islam recommends a government based on a social contract. People elect the administrators, and establish a council to debate issues. Also, the society as a whole participates in auditing the administration."
And on the subject of Al-Mawrid, the editor of its Urdu journal Ishraq, Manzoorul Hassan, has been shot in what the newspaper suggests was attempted murder (free registration required). This says something about Pakistani Islam and its violent undercurrent. Al-Mawrid has taken positions on Islamic law in Pakistan which can be described as 'liberal' (that is not confined to the paradigms of traditional authorities), although if you read the works of Al-Mawrid's founder, Javed Ahmad Ghamidi, they're quite conservative. Eteraz and Haroon have more on this.
Update: Haroon has a more detailed discussion in "The Jihad for Democracy".