IOSR Journal of Economics and Finance (IOSR-JEF) e-ISSN: 2321-5933, p-ISSN: 2321-5925.Volume 11, Issue 1 Ser. VII (Jan – Feb 2020), PP 49-61 www.iosrjournals.org DOI: 10.9790/5933-1101074961 www.iosrjournals.org 49 | Page Financial Deepening and Performance of Manufacturing Firms in Nigeria KAYODEOlawale Femi 1 , IBENTA Steve N.(Ph.D) 2 & OWOPUTI James A. (Ph.D) 3 1&2.PhD Scholar&Professor, respectively;Dept. of Banking & Finance.NnamdiAzikiwe University, Awka, Anambra State.& 3.Dean, School of Business Studies,Rufus Giwa Polytechnic, Owo, Ondo State. Abstract: Manufacturing sector is expected to be the engine for growth and development in any economy. The sector has continued to face several challenges hindering its optimal performance in Nigeria. In an attempt to revitalize the sector to play the expected roles, there have been concerted efforts by successive governments in Nigeria to deepen the financial system through the implementations of several financial reforms. Despite these efforts, it seems that the manufacturing firms in Nigeria have not achieved the desired level of performance. Based on the foregoing, this study investigated the effect of financial deepening on manufacturing firms’ performance in Nigeria. The data from 1986 to 2017, used for the study, were sourced from the publications of the Central Bank of Nigeria, National Bureau of Statistics and World Economic Indicators. Autoregressive Distributed Lag model was used to produce the parameter estimates. Also, Toda-Yamamoto causality procedure was applied to examine the causation among the variables. Further, the validity of the results was examined using Breusch-Pagan-Godfrey test. The findings reveal that financial deepening has a significantly positive effect on the average capacity utilization of manufacturing firmsin Nigeria. Further, the findings show a unidirectional causality from financial deepening to average capacity utilization of manufacturing sector in Nigeria. The major implication of the findings is that financial deepening has significant effect on manufacturing sector performance in Nigeria. It is therefore recommended among others that government should promote financial deepening strategies that increase capital expenditure, relax capital market entry requirements and allow institutional interest rate to operate at equilibrium level to encourage credit to the private sector, thereby enhancing manufacturing sector performance in Nigeria. Keywords: Manufacturing Sector, Financial Deepening, Average Capacity Utilization and Credits to the Private Sector --------------------------------------------------------------------------------------------------------------------------------------- Date of Submission: 19-02-2020 Date of Acceptance: 03-03-2020 --------------------------------------------------------------------------------------------------------------------------------------- I. Introduction Financial system has always played an important role in supporting economic programs and activities. Sanusi (2010), observed that a well-functioning financial system is able to mobilize household savings, allocate resources optimally, efficiently diversify risk, enhance the flow of liquidity, reduce information asymmetry and transaction cost. These functions therefore, suggest that financial system is expected to play a crucial role in promoting manufacturing sector performance,economic growth and development. The contribution of the financial system towards the growth of the manufacturing sector is mainly credited to the role it plays in savings mobilization and allocation of resources from the surplus to the deficit sectors of the economy (Nwakoby&Ananwude, 2016).Significant roles in intermediation are expected to be carried out by the banking sector and the capital market. As such, there is always the need to reposition them for efficient and effective performance through regular reform process geared towards deepening the financial system to forestall financial crisis and distress (Uduak&Ubong, 2015). It is generally agreed in theoretical literature that intensification of financial institutions and instruments through reforms would greatly reduce transaction and information costs in an economy with a multiplier effect on savings rate, investment decision and technological innovative enterprises (Nwakoby&Ananwude, 2016). According to Ezu, Okoh and Okoye (2017), the high rate of growth and stability obtainable in developed nations can be attributed to the reforms undertaken in their financial system overtime. Nigerian government has embarked on various reforms geared toward deepening the financial system to make the banks and the capital markets to be among global players in the international financial markets. Financial deepening are productsof restructuring, innovations and reorganization embarked upon by financial regulatory bodies to develop the financial system, which enables the economic sectors to expand, become buoyant and competitive (Ojo, 2010). Hence, it is therefore expected to enhance manufacturing firm productivity, sustainable economic growth and development.