The UGA Karate Club employs such a system. Students are formally tested at various times during the year, and those who show a sufficient degree of skill are advanced to the next belt rank. The process is nowhere near as mechanically precise as this description indicates, however. A student's determination and attitude are much more important than his or her physical skills, and there is no exact way to measure these attributes. In short, if you come in and grit your teeth and show that you care about what you're doing, it will overshadow whatever flaws may exist in your actual technique.
Attendance is also a factor at test time.
While the club has no set attendance policy, the instructors do tend to notice who has been showing up and who has not. If your attendance has been very poor, it is doubtful that you will be selected to test. The WTF charges fees for belt testing within its membership ranks. The Karate Club only charges these fees for green belt and up. Below is a list of the belt ranks the Karate Club utilizes, in order.