The word is
ijtihad: ij-ti-had. Pronounced idge (like the border of an area, or a feeling that makes you scratch) + tea (like the drink, only not spelled the same) + hod (what a bricklayer carries bricks in). The concept is being promoted by Canada's lesbian Muslim dissident Irshad Manji, in her
Project Ijtihad.
The Classical Arabic word for an MTF transgender or transsexual person is
mukhannath. Yahya ibn Sharaf al-Nawawi in the 13th century wrote--
"A
mukhannath is the one who carries in his movements, in his appearance and in his language the characteristics of a woman. There are two types; the first is the one in whom these characteristics are innate, he did not put them on by himself, and therein is no guilt, no blame and no shame, as long as he does not perform any (illicit) act or exploit it for money (prostitution etc.). The second type acts like a woman out of immoral purposes and he is the sinner and blameworthy."
Further on, al-Nawawi explains that the negative hadith reports only refer to the second kind (similar to what we would call a drag queen), not the
mukhannaths in general. The first kind sounds to me very close to modern understandings of TS. It's easy for us to distinguish between TS and drag queens, well the distinction was known to thinkers of olden times too.
Although some Muslims today claim that a transsexual should be punished severely, there is no such report from Muhammad's life. In fact, even long after the time of Muhammad, Muslims accepted the mukhannathun in the sacred boundaries of Islam. There was a mukhannath who was friends with the Prophet's wives and used to visit his house and hang out with the women, in women's space where men weren't allowed.
Khomeini in Iran and al-Tantawi (the Shaykh of al-Azhar, the top Sunni Islamic authority) both issued fatwas that transsexuals should be allowed to transition, get SRS, and live as their target gender. I have heard that more SRS is performed per capita in Iran than in any other country in the world.
It sounds very positive for us TS folks, but the dark side of it comes in reports that Iranian authorities are forcing gays to transition in order for them to get married heterosexually, in other words, to negate their gay identity. If so, this is a heinous abuse of SRS and not at all what it's meant for.