Millions of tourists visit India’s world-famous Taj Mahal every year. Built more than 350 years ago by the Mughal emperor Shah Jahan in memory of his beloved wife, Mumtaz Mahal, the Unesco World Heritage site symbolises India and its adjacent identical mosques provide a grand example of Islamic design and creativity.

In 1947, the partition of British India was instituted on the basis of religious demographics with the creation of the sovereign states of India and Pakistan, both of which had significant Muslim populations. The Muslim population of India now has reached some 150 million, or 13.5% of the country’s population, giving the country the third largest population of Muslims in the world, after Indonesia and Pakistan.

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Islamic finance capacity?

Does India therefore aspire to establish an Islamic finance sector in the same way that other countries, including neighbouring Pakistan, have done? The deputy governor of the Reserve Bank of India (RBI), Anand Sinha, is unequivocal in his response: “Our current banking system is not compatible with Islamic finance.”

Bankers seem to share RBI’s views, and are unanimous in responding that they see no possibility of Islamic finance developing in the future. While neighbouring Muslim states are seeing the attractions of Islamic finance, India has made its opposition to the alternative financial system abundantly clear.

Islamic finance aside, Mr Sinha is bullish about India’s banking sector. “The banking system is bound to grow substantially,” he says, adding that India’s 77 main banks – comprising 27 public sector banks, 30 foreign banks, 10 new-generation private banks and 10 old-generation private banks – are strong and well managed but still need to improve in terms of technology and risk management.

Resolute results

The performance of India’s banks has remained steady in the past few years, despite the international global crisis, with return on equity at 13%. Mr Sinha is confident that India’s low credit-to-gross domestic product ratio of 60% will grow in the next five to 10 years as banks expand. Domestic-driven manufacturing is one likely engine to this growth, with an estimated $1000bn to be spent on infrastructure alone between 2012 and 2017.

Mr Sinha is also keen to improve financial inclusion and offer incentives to those banks focusing on getting some of the 60% of the unbanked population banked.

Comparing India with China, Mr Sinha acknowledges that India’s banks should be larger and that the country needs banks that can finance its growing needs. India has just one-third of the number of banks as China in the Top 1000 World Banks listing, published by fDi’s sister publication The Banker. While he acknowledges that consolidation has not taken off, Mr Sinha is keen to add that India's "banks need to be bigger but develop as simpler structures and not become too complex". He sees the country’s banks becoming more sophisticated over the next decade, with many changing their business model.

Mr Sinha explains how the new generation of private banks in India have taken 10% market share from public sector banks in a trend that is likely to continue. In its latest report, RBI showed that nationalised banks accounted for 52.2% of aggregate deposits, while State Bank of India and its associates accounted for 21.8%.