Islam has the correct answer to creating "loans". Islamic "banks" (investment firms) create partnerships like this:

The person wishing to get a "loan" puts up an amount of money and the "bank" puts up the rest of the money required to buy a house.

The house goes into a partnership and the "owner" becomes both a renter and a partner. The owner pays rent (similar to how a home mortgage has a monthly payment). The rent is divided between the bank and the owner, but in such a way that the owner's equity increases and the banks ownership decrease. The rent has to be large enough to give the bank a profit on the investment, while increasing the owner's equity in the partnership. When the owner's equity reaches 100%, the partnership is dissolved and the owner has the house free and clear.

As with any partnership, there are stipulations as to how the property is to be maintained, and if the owner fails to make repairs, the "bank" can make the repairs and decrease the owner's equity by the amount of the repairs.

Now here's the cool part: If the owner fails to pay the partnership rent, the house is not immediately in default. The owner's equity is simply reduced and the banks ownership is increased. This differs from a mortgage where the house can be repo'ed if to many payments are missed. This gives the owner a little to fall back on if a job is lost or other economic hard times are encountered. Eventually, however, if the owner's equity falls to zero, the "bank" takes full possession the house and evicts the delinquent renter.