The Government's review of small amount credit contracts should focus on developing mechanisms to fund more affordable small loans, according to a report on the sector.The Australian Centre for Financial Studies has released 'Trends in the Australian Small Loan Market'. The ACFS funded the study, which was done by members of the School of Economics, Finance and Marketing at RMIT University.The report said policymakers needed to be realistic about what could be achieved through tighter regulation of the controversial industry. Lowering fee caps, for example, may have the unintended consequence of encouraging illegal lending activity.It also said that, if policy was to be effective, a greater degree of transparency was required, with more access to data around credit volumes and loan performance.In September the Government issued a consultation paper, setting out its review objectives. The review panel will look at whether there should be any further regulation of the sector or change to current regulation, whether the current sanction regime is working and the extent of avoidance practices in the industry.It will look at whether there should be a national database of small amount credit contracts to assist providers in assessing applicants.Small amount credit contracts are loans up to A$2000 where the term is between 16 days and 12 months. Many of the borrowers who use them are excluded from other forms of personal finance and 25 per cent have income below the Henderson Poverty Line.According to the RMIT report, 1.1 million Australians are estimated to have taken out an SACC in 2012, generating contracts worth between $800 million and $1 billion. Sector revenue has grown at an estimated annual growth rate of 7.7 per cent a year - outstripping the conventional banking market.Borrowers take out an average to three to five loans a year and 40 per cent of respondents to a 2014 survey said they were in constant debt.A 2012 survey found that 68 per cent of borrowers use the funds for day-to-day living expenses rather than one-off expenses.Growth has been associated with a rising level of income inequality, increasing rates of casualisation of work and a lack of alternative credit products.A common characteristic of small amount loan models is that because start-up costs are high and margins low, revenue lines only tend to become profitable after the second or third loan.  Profits appear to be derived from chronic borrowers.In March the Australian Securities and Investments Commission released a review of the SACC market, saying that lenders were not following their own policies for protecting vulnerable consumers, were poor record keepers and were failing to meet their obligations in a number of areas.The RMIT report called for stronger reporting obligations and tighter lender compliance with presumption of unsuitability rules (a presumption that a loan is unsuitable if the borrower has held two other SACCs within the past 90 days).