Business expert Prof Dylan Jones-Evans said Finance Wales has focused more on generating profits than developing the Welsh economy.
Finance Wales was set up in 2001 to lend money to or buy shares in Welsh companies, investing £31m last year. The report asked if it was essentially being run as a commercial fund manager.
Prof Jones-Evans, an academic at the University of the West of England, was asked in June by Economy Minister Edwina Hart to examine funding for small and medium-sized enterprises (SMEs) who faced difficulties borrowing from banks.
In the first part of his report, Prof Jones-Evans called on the Welsh government to clarify the role of its investment arm Finance Wales stating there "remains confusion" about its exact role, and concerns about its charges.
In October the first minister announced that SMEs in enterprise zones would receive a 2% reduction in interest rates charged on new loans from Finance Wales.
But the second part of the report, published on Tuesday, said Finance Wales was offering higher rates of interest on borrowing than it needed to under EU state aid guidelines.
Prof Jones-Evans wrote: "It remains unclear as to whether Finance Wales is still essentially operating as a commercially oriented fund manager in all but name.
"Given this, the minister may have a view as to whether Finance Wales is fit for purpose or whether the organisation needs to be taken in-house into the Welsh government so that it can focus on its economic development role for the Welsh economy."
Prof Jones-Evans called for Finance Wales to be incorporated into a new one-stop-shop operation called Development Bank of Wales.
In response, Mrs Hart told AMs the review had "raised important challenges for both private sector and government that need full and thorough consideration".
"The full scope of the professor's recommendations will require further investigation and a short consultation period will now open."
Opposition parties blamed the Welsh government for the problems highlighted by the report.
The Welsh Conservatives said small firms had been "ripped off" for too long.
Shadow Business minister Nick Ramsay said: "It appears that [First Minister] Carwyn Jones's small business lending body has been ripping off Welsh businesses for a decade by charging over-inflated interest rates in Welsh Labour's equivalent of the Libor scandal.
"Small businesses in Wales must be able to access funding at affordable rates to allow them to compete with firms in other parts of the UK and in emerging markets overseas."
Ahead of the report's publication, Plaid Cymru repeated its calls to establish a new publicly-owned, not-for-profit bank to lend money to small businesses. Economy spokesperson Alun Ffred Jones said: "We need a new body, owned by the public but at arm's length from government to lend money to small businesses at competitive rates. "Securing cash flow for businesses, particularly for small businesses, is key in creating employment and keeping the wheels of the economy moving. "It is vital that our SMEs are able to access the resources they need in order to operate effectively and to prosper so that the Welsh economy can return to growth," he added.