The interplay of rainfall variability, poor maintenance of water sources and the cumulative effects of ecosystem degradation in Lake Baringo Basin, have not only enhanced water scarcity , but increased competition and strengthened water resource-based conflicts amongst different water users and uses. Statutory laws rarely address water scarcity related problems because of existing mismatches between the law and reality. Hypotheses on the reasons for this include the failure of the water policy and law to accommodate bylaws. Local communities formulate binding bylaws to allocate and regulate access to and use of water. Land use change in upstream areas has worsened water scarcities in downstream areas. Given the magnitude of water scarcities, water ‘market-like' initiatives have provided ‘soft' solutions and opportunities for exploring new and innovative approaches for water management in arid and semi-arid lowlands of Lake Baringo Basin. This has catalyzed the emergence of new institutions, including bylaws focusing on water development, allocation, regulation and conservation. Locally derived by laws have significantly promoted the functioning of ‘ water markets'. Using two cases, this paper discusses the theoretical foundations for water markets revealing that with a well-designed, measurable and enforceable water use rights system however crude it is and good mix of by-and statutory laws , it is possible to enhance water regulation, allocation an d conservation, especially in water stress environments.