So how did the Prophet Muhammad govern the young polity that he established in Medina?

Since people swore allegiance to Muhammad when they converted to Islam in effect they had also chosen him as their leader. A city charter for Medina was put together which became the constitution of the new polity. The charter guaranteed rights of its citizen irrespective of their religious beliefs in return for some shared responsibilities as citizens. It may come across as too good to be true but no one was paid for the state work including the Prophet himself. All work including the expenses of the state were funded through giving time voluntarily and donations.

Muhammad always involved people in decision-making. He had an advisory council made up of tribal elders and persons respected by the people. All decisions were discussed in the mosque, transparent to the whole community. Anyone could join and take part in discussions. Muhammad made clear what was revelation and what constituted his own thoughts in order to empower people to challenge his views. There are reports that women were also involved in the consultation process. By and large he always followed the consensus of people. When discussing the defence strategy to follow in the wake of an attack on Muslims, for example, he went ahead with the consensus of defending the city of Medina out in the open desert even though his personal view was to defend the city from within the walls. When in the subsequent battle of Uhud, which Muslims lost, neither did he lay blame nor punish anyone for the misfortune.

He appointed governors to cities and regions in Muslims control and empowered them with extraordinary freedom in their rule. The only stipulation to governors was adherence to the Qur'an and Sunnah (Practice of the Prophet) in dealing with matters concerning people. People were also allowed to raise their voice in disagreement with a governor or even with the Prophet himself. In some instances, some governors were replaced as a result of complaints. In his appointments of officials, Muhammad looked for performance and competence rather than kinship. He actually purposely did not appoint his kinship in state office to stop people even thinking about the possibility of alleging nepotism.

For the first time in Arabian history the Prophet Muhammad started an literacy campaign, a census was ran and population figures were recorded; the idea of a state treasury was established; a liberal market economy that was based on free trade was supported and economic activity (market prices and quality of goods) was regulated for the benefit of consumers.