Shi'is also reject the legitimacy of the Umayyad and 'Abbasid caliphs, as well as the authority of all later Sunni rulers. Shi'is assert that 'Ali's descendants, known as Imams, should have been leaders of the entire Muslim community. They are divided in their belief in the number of authentic Imams, some known generally as Isma'ilis and led by the Aga Khan, assert there were seven, others, the majority of Shi'is, identify twelve. However, both Shi'I sects assert that their last Imam did not die, but disappeared into a kind of spiritual concealment to return, in an idea borrowed from Christianity, as the mahdi, to restore justice on earth. The most important practical effect of this belief is that in Shi'i societies religious leaders often became political activists, for when, as in late nineteenth century Iran, Shi'is openly denounced the legitimacy of dynastic rulers, some members of the clergy claimed they were the proper earthly representatives of the hidden Imams, a role that some of Ayatollah Khumeini's follower in Iran claimed for him after he returned to Iran in 1979 from exile in Paris and Iraq.

Shi'i Islam began as a dynastic dispute, although one that stemmed initially from the resentment of Muhammad's family, the Banu Hashim, after they lost the special status they had enjoyed during his life. Shi'i means "faction" or "party," and the original Shi'is were Muslims from Kufa in Iraq known as the Partisans of 'Ali, the shi 'at 'Ali, who first began to agitate on behalf of 'Ali's claim to the Caliphate. When 'Ali himself became the fourth Caliph in 656 CE, he did not make theological claims to divine guidance – others made those long after his death. He did, however, assert that he had a superior claim to the Caliphate, based on his kinship with Muhammad and his service to Islam. 'Ali's assassination in 661 represented the continuation of a dynastic civil war, which pitted 'Ali's successors, the founders of the Umayyad Caliphate of Damascus, against 'Ali's sons and descendants.

The Umayyad attempt to eradicate the resistance of 'Ali's family climaxed in 680 at Karbala, Iraq, with the massacre of Husayn, 'Ali's son and Muhammad's grandson, and the slaughter of more than twenty other members of the Prophet's family. This event, more than any other, spurred the transformation of shi'at 'Ali from a group of dynastic loyalists to sectarian activists. In particular, the shocked reaction to Husayn's death came to be commemorated as the Passion of Shi'i Islam, celebrated during the month of Muharram, the month of the massacre, with public mourning, ritual self-flagellation and passion plays, recounting the massacre. Many Shi'i Muslims experience a profound emotional catharsis during Muharram, one that has no equivalent in the Sunni world.

Throughout the history of the Muslim world Shi'i's were always a minority community, often attracting to themselves Muslims who were socially marginalized or dispossessed. One of the consequences of their minority status was peculiarly Shi'I theological ruling that it was justified for Shi'is to conceal their beliefs. In consequence, Shi'i political activism had a conspiratorial or revolutionary quality from a very early date. Occasionally before the Iranian revolution of 1979 Shi'is founded dynasties. The Fatimids of Yemen, North Africa, Egypt and Syria (r. 909-1171 CE) were the most important of these. Shi'is of the Ismai'li sect, the Fatimids took their name from Muhammad's daughter Fatima. The dynasty's founder, the Fatimid Imam, proclaimed himself caliph and al-Mahdi, the Shi'i messiah, and aggressively sponsored the missionary activity that brought them to power.

The Fatimid Imam, who consistent with Shi'i doctrine, presented himself as the divinely guided leader of all Muslims, established a state-financed mission that dispatched agents to convert the Sunni world to Shi'i Islam. The most notorious of these missions was led by Hasan-i Sabbah in Iran, who organized assassinations of Sunni Muslim leaders. The English word assassin is thought to derive from Hasan-i Sabbah's supposed practice of giving his agents hashish before their missions, who then became known as hashishiyyin.

The Fatimids, however, were exceptional, and for most of Islamic history Shi'i Muslims have lived as minority members of Sunni states or communities. This was true, for example, of the Shi'is' principal shrine and pilgrimage centers of Kufa and Karbala, Najaf and Samarra, which for most of their history were included in provinces of Sunni Muslim states. Prior to the British occupation of 1918, these Iraqi cities had been part of the Sunni Ottoman Empire (1300-1919 CE) for most of the previous 400 years. During most of that period they had been a neglected backwater, a frontier zone between the Ottomans and the Safavids of Iran (1501-1722 CE), a militantly Shi'i state that conquered the Iranian plateau between 1500 and 1510, forcibly imposing the Shi'i faith in the process.

In the nineteenth century Iranian and Indian Shi' pilgrims and Indian money flowed into the shrine cities, dramatically increasing their prosperity and religious influence throughout the region, and during this era Iranian clerics came to dominate Shi' affairs in Karbala and elsewhere. In the late nineteenth century the Ottomans founded a Sunni madrasa or seminary in Samarra to try to counteract growing Shi'i prosperity and power in southern Iraq, but these attempts of a disintegrating empire had little effect, and by the time the Ottoman state collapsed in 1919, Shi'is had become the majority in the southern Iraqi region. Many of the tribes who are now part of the Shi'i majority population converted from Sunni to Shi'i Islam only during the second half of the nineteenth century.

Shi'i clerical leaders known as mujtahids, who had dramatically increased their influence in southern Iraq during the nineteenth century, were stimulated to political activism by events in the Ottoman Empire and Iran in the early twentieth century. The Young Turk Revolution of 1908 and the Iranian Constitutional Revolution between the years 1905-1911 exposed Shi'i clerics in Iraq to political activism and modernist ideas, and, one might say, represented the first appearance there of what observers now commonly call "political Islam." Iraqi Shi'is were stimulated by the appearance of books and periodicals from Istanbul and the example of Iranian Shi'i clerics actively participating in the Iranian revolution. Then in 1919 a British supervised plebiscite stimulated Shi'i clerics, most of them still Iranians, to press for an Islamic constitutional monarchy in Iraq, and in the following year they instigated a revolt to establish such a state. However, by late 1920 British authorities suppressed the revolt, and in the following year arranged for the enthronement of King Faysal, the son of Sharif Husayn of Mecca, as King of Iraq. Not until 2003 did Iraqi Shi'i religious leaders have another opportunity to take control of the Iraqi state.

The basis of the sectarian conflicts in twenty-first century Iraq can be directly traced to the British creation of a nation state in Iraq. Both the Sunni dominated constitutional monarchy and its successor, the Sunni dominated Arab-Socialist regime brought by a bloody coup in 1958, regarded the Shi'i clerics as threats to the integrity of the Iraqi nation state. Intensifying these regimes' hostility was the dominance of Iranian Shi'is as leaders of the shrine cities in the south. The expulsion of many Iranian Shi'is to Iran decreased their influence, but did not lessen the goal of either the monarchical or republican governments to isolate Shi'i clerics – from the local tribal shaykhs and Shi'is in Iran. Both governments were successful in undermining the influence of Shi'i clerics in the shrine cities.

As Baghdad grew in power and economic influence many Shi'is migrated to the capital and considerable numbers of them who had professional or technical educations and became the nucleus of a new middle class, intermarried with Sunnis. However, in the bulk of the Shi'i population remained concentrated in southern Iraq, and the goal of Shi'i mujtahids in the late twentieth century was not separatism, but political parity with Sunnis in Baghad. The Shi'i uprising there following the 1991 Gulf War was an inchoate, unplanned revolt, stimulated by Western powers and the Iranians. Sadam Husayn's brutal suppression of the revolt laid the groundwork for the current situation, in which the Shi'is dominate the Iraqi government and are on the verge of achieving what the British denied to them in 1920 – not parity but dominance.