The term comes from one of the 99 Asma-ul-Husna, “Ar-Rasheed”. This name itself means “The Guide”. Since it’s Allah’s name, those whom he guides never go astray. Similarly, when amongst human beings, a person chosen to be a guide is called a Murshid. In this context, Murshid is someone that a person chooses to guide them on the path of deen. Our Sarkar, Hazrat Baba Shah Mehmood Yousufi (ra) often cites Surah Kahf (18:17) when the topic ever came up. Allah clearly mentions in this Ayat that whoever Allah holds strayed, finds neither a “Wali” nor a “Murshid”. Which, in retrospect, means that Allah provides a Wali and a Murshid to those whom he wants to guide. For this reason, people tend to look for those people who are Wali of Allah. A Sheikh is someone who is designated as an accomplished Guide by his Murshid. So there is a clear chain of authority from above.
A thing to remember is that not all Wali’s are Murshid. But anyone chosen to be a Murshid needs to be a Wali. Similarly, not every Sheikh is your Sheikh. Simply because the Nisbat or relationship between a Murshid and a Mureed is a very close and private relation. Your Murshid has to have a full understanding of not just your Ruh, but also your psyche. Unfortunately, this selection of authorizing a person to become a Sheikh has not only recently become riddled with problems, but has been for a very long time. It is for this reason that anyone looking for a Sufi Master, Murshid, or Sheikh takes their time and thoroughly satisfies themselves before taking bay’at at the hands of anyone. Our own Sarkar, Hazrat Baba Shah Mehmood Yousufi (ra), says that he himself took a long time before deciding to take bay’at. It’s not something one should do in haste, under peer pressure, or even courtesy.