Ijtihad is an Arabic word, derived from the root JHD, (as is jihad). It literally means "striving with full exertion." Within the legal philosophy of Islam, it refers to a logical deduction on a legal or theological question which has not before arisen. One who is qualified for ijtihad is called a mujtahid. The evidence for the approval of this is from hadith:
"The Prophet wished to send a man named Mu'az to al-Yaman to receive some money collected for alms, which has was then to distribute to the poor. On appointing him, he said: "O Mu'az, by what rule will you act?" He replied, 'By the Law of the Qur'an.' 'But if you find no direction therein?' 'Then I will act according to the Sunnah of the Prophet.' 'But what if that fails?' 'Then I will make an Ijtihad, and act on that.' the Prophet raised his hands and said, 'Praise be to God who guides the messenger of His Prophet in what He pleases.'"
There are different levels of ijtihad and different levels of mujtahids correspond to them. The top class is Ijtihad fi'sh-Shar, or absolute ijtihad. An absolute mujtahid (mujtahid mutlaq) may derive rulings based solely on the Qur'an and Sunnah, using logic, knowledge of purpose and analogy to develop legal rulings, without reference to any other scholar. This gift was bestowed on many of the first generation of Muslims, which obviously included the Sahaba. It was also found among the second generation, and sometimes among the third. The prophet (SAW) said the best of the believers would be from the first generation, then the second, then the third. From among the second and third generations, we have the founders of the madhabs of Sunni Islam, Abu Hanifah, Malik, ash-Shafi'i, and Ibn Hanbal (radiallah anhuma). Two other madhabs were also founded but died out in the 8th century after the hegira. Confirmation of this rank requires extraordinary knowledge. I have seen different lists of qualifications, but these are among them:
  1. The knowledge of the Qur'an and all that is related to it; that is to say, a complete knowledge of Arabic literature, a profound acquaintance with the orders of the relationship to each other and their connection with the orders of the Sunnah. The candidate should know when and under what circumstances each verse of the Qur'an was revealed, he should have a perfect acquaintance with the literal meaning of the words, the speciality or generality of each clause, the abrogating and abrogated sentences. He should be able to make clear the meaning of the "obscure" passages (Mutashabih), to discriminate between the literal and the allegorical, the universal and the particular.
  2. He must know the Qur'an by heart with all the Traditions and explanations.
  3. He must have a perfect knowledge of the Traditions, or at least of three thousand of them. He must know their source, history, object, and their connection with the laws of the Qur'an. He should know by heart the most important Traditions. He must know the soundness and weakness of hadith and where to find them.
  4. A pious and austere life.
  5. A profound knowledge of all the sciences of the Law, including understanding principles of fiqh, such as certainty is not removed by doubt.
  6. A complete knowledge of the four schools of jurisprudence (madhabs). This is an additional requirement placed upon a modern scholar not required of those among the first three generations (since those schools had not been developed to the extent they have been in this day).
It is generally agreed that Imam Ibn Hanbal, who died in the third century after the hegira, was the last muslim to be recognized as an absolute mujtahid. All the scholarly opinions I have seen from Sunni scholars indicate that it is obligitory for a Muslim to follow one of the four madhabs founded by these men.

One may frequently hear about the doors to ijtihad being closed, much to the chagrin of many Muslims. It would be hard to believe that an absolute mujtahid would be confirmed in this day, as scholars are already attached to the well developed legal rulings based upon the work of the aforementioned four, and would likely be loathe to leave them and learn a new set of rulings.

There are two other classes of ijtihad, relative and special. Relative means the mujtahid in question can develop legal rulings within a specific school relying on the methods of the founder, and special means that the scholar can develop rulings about a specific area of law.

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