Even if the banks weren't trying to make a profit, you'd still have to pay interest as loan-making is inherently risky enough that at some point, somebody has to cover the costs of those who default.
I prefer the suggestion of Positive Money ( http://positivemoney.org ), which is that bank accounts are split by savings and investments. Savings would just keep your money safe (no interest), investments would have a potential return but also carry the risk of a loss. It'd be up to you how you wanted to split your money between savings and investments.
The bank that is the closest to this model (that I know of) is Mondo (due to be launching soon). Along with it's other innovations, it plans to allow you to invest money via Funding Circle for a potential return:
This is a smart idea on a couple of levels, it mitigates against the risk of bank runs and it provides a better return than many high street banks offer (the current average return rate from Funding Circle is 6.6%):
Absolutely. But if retail banking were run predominantly by non-profits, we'd pay a lot less of it.
Mortgages are secured loans, so an individual default is no problem. The primary risk is of mass default (a housing crash).
If you agree with the pseudo-MMT view of the world, then the mortgage is created out of thin air in the first place, so if everybody defaults all that happens is that the money supply increases permanently instead of temporarily.
If your legal tender currency is created primarily through loans, then it is loan-backed.
As you noted, the concept of a "loan" entails the possibility of default.
If most currency is created through loans and loans must be repaid in that currency, the system-wide probability of defaults is significant. The likelihood of defaults increases as loans require payors to also include tribute payments (interest), for which no currency was ever created (necessitating that the payor obtain the requisite currency from someone else before the default day occurs).
