Investment Auctioning

Another method for replacement of interest in the case of long- and medium-term financing in the industrial sector is the system of investment auctioning. Under this system, commercial banks may form a consortium with long-term financing institutions and formulate industrial projects with complete details. Thereafter, the consortium may announce the project with the assurance to make available the needed plant and machinery of specific description and call for bids from prospective investors for the purchase of the machinery. The consortium may fix a reserve price which may include a reasonable profit margin. It may also reserve the right to accept or reject any bid. The project may then be awarded to the highest bidder if the party is considered to be a sound one. Otherwise, the project may be awarded to the next highest bidder considered capable of efficient implementation and running of the project, provided the bid is higher than or at least equal to the reserve price. It will be the responsibility of the consortium to make the plant and machinery of the agreed specifications available to the successful bidder in accordance with the agreed time schedule while the bidder will be under obligation to accept this machinery from the consortium1. The agreement may also provide for necessary safeguards to the consortium against undue delay in implementing the project or possible malpractices on the part of the investor. The amount of the bid accepted would be repayable in instalments over the agreed period. The liability of the investor whose bid is accepted by the consortium would be independent of whether he earns a profit or incurs a loss.

The most significant advantage of this system from the economic point of view would be that the price paid by the investor for industrial machinery would adequately reflect the potential profitability of the project which is essential for efficient allocation of resources.

Source: Money and Banking in Islam, Ziauddin Ahmed; Munawar Iqabal; M. Fahim Khan. Republished with permission.