This paper examined the modes of funding Nigerian universities with a view to assessing their adequacy and effectiveness. The implications of the mechanisms of funding on university performance were investigated. The history of university funding in Nigeria was explored in order to determine the causes of shift in financing the system since 1948 when the first university was established. The paper revealed that the costs of financing universities including: costs of teaching, research and administration, cost of accommodating increased enrollments, expenses of student maintenance, payment of staff entitlement/salaries and maintenance of facilities are increasing in excess of the corresponding rates of available revenues. The divergence in the trajectories of total university educational cost, the total available revenue and government subvention has led to capacity constraints of universities. This is evident in poor quality of teaching and research, poor conditions of work and insufficient attention to staff development, amongst others. The study found that the changing patterns in funding of universities are responses to the social and economic depression of the country, globalization, country's desire to be integrated into the modern knowledge economy and increased enrollment without adequate planning. Consequently, the African political economy model was used in explaining the financial state of Nigerian universities, while the theory of human capital was used to support the arguments in favour of multiple forms of cost-sharing. These include private support from parents/students and donors since education is both a government and private investment. The study concluded that part of the solutions to cost-revenue squeeze in Nigerian universities is the development of proactive mechanisms that facilitate both the identification of multiple sources of funding as well as their optimal utilization in order to maintain financial balance and enhance performance. The Resource-Based Model for sustaining financing of universities was thus recommended. (Contains 2 tables.)