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1 BACKGROUND INFORMATION 2 The primary development goal for Kenya is to achieve a broad-based, sustainable improvement in the standards of welfare of all Kenyans. This will require a concerted effort to tackle the intolerably high incidence of poverty that now afflicts about half our population. While Government has a particular responsibility for spearheading action and creating a positive framework, the private sector, non-governmental and community based organizations all have a vital role to play in meeting the challenge of poverty reduction. Kenya must mobilize all available resources and use them efficiently and effectively in the fight against poverty. Alleviating poverty remains one of the key challenges in many developing economies. In Kenya, a recent nation-wide survey, the 2006 Kenya Integrated Household and Budget Survey, (KIHBS) finds that 46% of the total Kenyan population is absolutely poor, i.e. below the poverty line, whereas 49% of the rural population is absolutely poor (Kenya National Bureau of Statistics, 2007). The 1997 Welfare Monitoring Survey showed a poverty rate of 57% overall and 60% in the rural population. There has, therefore, been some reduction in poverty across the country and across rural areas over the last decade. Poverty is not a static concept. People often move in and out of poverty from year to year. This is unsurprising in Sub-Saharan Africa, given that these economies mainly depend on agriculture and are dominated by seasonality and highly variable weather conditions. Changes in poverty status can be due to economic cycles and shocks, such as poor weather, loss of employment, or loss of a major income earner through death, injury, or long illness. Adding to this, institutions for income and consumption smoothing in these economies are either inadequate or are absent altogether. Some households do manage to escape poverty, while others remain in poverty for extended periods of time. Understanding what factors drive household movements in and out of poverty is extremely important for the design of poverty reduction strategies, and is still an open area of research. Microfinance, the provisions of financial services to the low-income households and micro and small enterprises (MSEs), provide an enormous potential to support the
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economic activities of the poor and thus contribute to poverty alleviation. Widespread experiences and research have shown the importance of savings and credit facilities for the poor and MSEs. This puts emphasis on the sound development of microfinance institutions as vital ingredients for investment, employment and economic growth. The potential of using institutional credit and other financial services for poverty alleviation in Kenya is quite significant. About 18 million people, or 60% of the population, are poor and mostly out of the scope of formal banking services. According to the National Micro and Small Enterprise Baseline Survey of 1999, there are close to 1.3 million MSEs employing nearly 2.3 million people or 20% of the countrys total employment and contributing 18% of overall GDP and 25% of non-agricultural GDP. Despite this important contribution, only 10.4% of the MSEs receive credit and other financial services. The formal banking sector in Kenya over the years has regarded the informal sector as risky and not commercially viable. According to the Poverty Reduction Strategy Paper (PRSP) of 1999, a large number of Kenyans derive their livelihood from the MSEs. Therefore, development of this sector represents an important means of creating employment, promoting growth, and reducing poverty in the long-term. However, in spite of the importance of this sector, experience shows that provision and delivery of credit and other financial services to the sector by formal financial institutions, such as commercial banks has been below expectation. This means that it is difficult for the poor to climb out of poverty due to lack of finance for their productive activities. Therefore, new, innovative, and pro-poor modes of financing low-income households and MSEs based on sound operating principles need to be developed. In the past, microfinance institutions (MFIs) established using either an NGO or a savings and credit co-operative societies framework have been important sources of credit for a large number of low income households and MSEs in the rural and urban areas of Kenya. The MFIs have, however, operated without an appropriate policy and legal framework. There is therefore need to focus more on these institutions to enhance their effectiveness in the provision of savings, credit and other financial services to the poor and MSEs.

The Government of Kenya recognizes that greater access to, and sustainable flow of financial services, particularly credit, to the low-income households and MSEs is critical to poverty alleviation. Therefore, an appropriate policy, legal and regulatory framework to promote a viable and sustainable system of microfinance in the country has been developed via the proposed Deposit Taking Micro Finance Bill. In drafting the Bill, the Government has consulted with stakeholders to get their views on the best way to create the required enabling environment for the microfinance sub-sector. In addition, fullfledged microfinance units have been established in the Ministry of Finance (the Treasury) and the Central Bank of Kenya to formulate policies and procedures to address the challenges facing microfinance institutions, especially in the rural areas, and to build a database to facilitate better regulation and monitoring of their operations. Over 100 organizations, including about 50 NGOs, practice some form of microfinance business in Kenya. About 20 of the NGOs practice pure micro financing, while the rest practice micro financing alongside social welfare activities. Major players in the sector include Faulu Kenya, Kenya Women Finance Trust (KWFT), Pride Ltd, Wedco Ltd, Small and Medium Enterprise Programme (SMEP), Kenya Small Traders and Entrepreneurs Society (KSTES), Ecumenical Loans Fund (ECLOF) and Vintage Management (Jitegemee Trust). The Kenya Post Office Savings Bank (KPSOB) is also a major player in the sector but only to the extent of providing savings and money transfer facilities. Many microfinance NGOs have successfully replicated the Grameen Bank method of delivering financial services to the low-income households and MSEs. Microfinance has become very important in global poverty reduction debates. The popular assumption is that enabling poor households access to credit helps households begin micro entrepreneurship which would enable them improve their incomes. Evidence from research so far has been scanty, and many results have been highly contested. So far no rigorous study has proved strong robust positive impact of microfinance in poverty reduction. On the other hand many studies suggest the possibility of positive impacts of microfinance on poverty reduction.

The term Poverty in simple definition means people who are financially challenged? Or its more understood as the inability to participate in society, economically or politically? This means definition of poverty varies. The multiple layers of meaning reflect the complexity of definition and can be so open when the society defines their own indicators of poverty. Poverty therefore refers the quality or state of being poor or indigent; want or inadequacy of means of subsistence. Poverty would be complex and difficult to quantify. Thus poverty is represented in two main models. Absolute poverty. Where people lack the necessary food, clothing, or shelter to survive. This is replicated in scarce resources, a condition characterized by absolute lack of basic human needs, including food, safe drinking water, sanitation facilities, health, shelter, education and information. It depends not only on income but also on access to social services. Relative poverty is based on a comparison of poor people with others in society or minimum acceptable standards of living. However, it may be less desirable if it leads to social and economic policies which give such an emphasis at reducing inequality that the cost includes keeping the incomes of the poorest at a lower level than they might have been had an absolute poverty measure been used to guide policy. Since there is no agreed general definition of poverty, in attempt to define it using various poverty terminologies which are in this case poverty indicators. Measures of poverty have to be 'indicators', or signposts. The most commonly used measure is based on: Income or consumption poverty, Human (under)development, Social exclusion, Ill-being, (Lack of) capability and functioning, Vulnerability, Livelihood unsustainability, Lack of basic needs. To fully define poverty, quantitative measures of poverty are used as indicators to conceptualize poverty .The commonly use arbitrary standard 1dollar a day. It really sounds better if we pitch our definition of poverty towards the causes. Since there is no explicit definition poverty but conceptualizing explanation which carries a closer meaning is lack of resource to a living.