Passed on Monday with 24 votes in favour, 18 against and one absentation, the law amends a 1968 law and allows the Central Bank of Kuwait (CBK) to issue licences to foreign banks or their branches.
The Foreign Direct Investment Law, which Kuwait began implementing in October, allows foreign banks to operate in the emirate only after securing approval from the CBK, which was unable to do so under existing legislation.
The new law, however, stipulates that Kuwaitis must form at least half of the bank's workforce within three years of operation, despite opposition from some quarters that the provision was difficult to implement.
"Foreign banks won't come here if you impose this high percentage of national manpower," liberal MP Muhammad al-Saqr said.
Lawmakers rejected a proposal to extend the deadline to five years.
The parliament also turned down a proposal by several Islamist MPs to force the incoming banks to operate in accordance with Islamic sharia law.
The law becomes effective only after Amir Jabir al-Ahmad al-Jabir Al-Sabah endorses it, based on the cabinet recommendation.
Currently, only 10 Kuwaiti banks operate in the emirate, including three specialised banks. All are small, apart from the National Bank of Kuwait, which is owned by leading merchant families.
Since the fall of Saddam Hussein in neighbouring Iraq, Kuwait has taken a number of decisions to open up its economy.
In October, the cabinet began implementing the long-delayed FDI law which practically opened up the Kuwaiti economy to foreign investors, with the exception of oil and gas.