Kuwait's parliament on Tuesday passed in principle a bill that requires the government to buy billions of dollars of bank loans owed by citizens and reschedule them after waiving interest.
Thirty-three MPs voted for the law, three opposed it while 20 members including all cabinet ministers present abstained.
To become effective, the law must pass another round of voting in parliament in the coming few weeks, approved by the government and then signed into legislation by the ruler of the oil-rich Gulf state.
The government expressed reservations at the law with State Minister for Cabinet Affairs Sheikh Mohammad Abdullah Al-Sabah saying "the law requires fundamental amendments" to be acceptable.
"The government rejects the law in its current form but will abstain from voting as a sign of cooperation," he told the house just before the vote.
Finance Minister Mustafa al-Shamali said the cost of the bailout under the law is "unknown and it could be between 1.0 billion dinars ($3.5 billion) and 4.0 billion dinars ($14 billion)."
Head of parliament's financial and economic affairs committee MP Yussef al-Zalzalah said the cost to be borne by public funds is around 930 million dinars ($3.3 billion).
Under the law, the government will purchase all loans taken by Kuwaiti citizens before March 30, 2008 from conventional and Islamic banks and financial companies.
The government will then waive all interest and reschedule repayment over a period not exceeding 15 years provided that the instalment will not be higher than 40 percent of the debtors' income.
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Based on the bill, at least 66,000 Kuwaiti borrowers will benefit from the bail out which does not cover expatriates.
During the four-hour debate, several MPs strongly blasted banks for causing the problem by illegally charging high interest on loans and demanded penalising banks by forcing them to refund the extra interest charged.
"What the banks did before 2008 was a clear robbery of people money," Islamist MP Khaled al-Adwah said.
Independent MP Salah al-Atiqi however charged that MPs were approving the law for political reasons.
"The story began with election promises by some candidates. There is no real debt problem and no country in the world has written off loans or interest. Waiving interest could trigger a collapse in the credit system or cause a financial catastrophe," Atiqi said.
MPs have also proposed that every Kuwaiti who does not benefit from the debt relief scheme should be given a grant of 1,000 dinars ($3,500). Native Kuwaitis number 1.2 million.
The government had rejected a similar bill passed overwhelmingly by parliament in January 2010. At that time, the size of debt stood at around $21.6 billion and the interest at $5.2 billion.
The change in government position came amid a bitter political dispute in the emirate and after the election of a pro-government parliament in a December poll boycotted by the opposition, which has staged several street protests.
"The issue is not technical only but also political. Let's give something to the people ... There are people out there who do not want this parliament to continue," parliament speaker Ali al-Rashed said during the debate.
OPEC member Kuwait holds assets estimated at $400 billion, mostly invested abroad, amassed during the past 13 years on the back of high oil prices.