(Corrects number of people in story filed on April 3 to 47,000 not 74,000, adds dropped word in para 14)

* Law applies to personal loans before end-March 2008

* Lawmakers say banks overcharged for credit

* Kuwait has given out financial aid in past

By Sylvia Westall

KUWAIT, April 3 (Reuters) - Kuwait's parliament approved a law on Wednesday to buy some citizens' personal loans and write off the interest after lawmakers argued that banks had overcharged Kuwaitis for credit.

Kuwait is one of the world's richest countries per capita and many lawmakers elected in a new parliament in December had made debt relief a priority of their campaigns and put pressure on the new cabinet to approve a plan.

Economists and government officials have voiced concerns about the long-term sustainability of such measures and say Kuwait should concentrate its funds on infrastructure development, not financial aid.

Such largesse has a long history in Kuwait.

The government wrote off almost all consumer debt after the 1991 Gulf War that ended Iraqi occupation, one of a series of handouts helping Kuwaitis return from exile and restart life in the country.

It then wrote off millions more in a plan to settle $20 billion in bad loans stemming mostly from a 1982 stock market crash caused by investors speculating on stocks with borrowed money.

Finance Minister Mustapha al-Shamali said on Tuesday that the government was expecting to pay up to 744 million dinars ($2.6 billion) for the latest plan, which covers personal loans taken out from commercial banks before the end of March 2008. Loans from Islamic banks are not included.

"The banks were accumulating their interest in an unfair and unjust way," MP Maasouma al-Mubarak said ahead of the vote. She said the central bank had not done enough to check the rates banks were charging Kuwaitis for loans.

Under the law, banks would have to pay back any overcharged interest to citizens. This would apply to interest charged at more than 4 percent over the discount rate and it was not immediately clear how much this would cost.

"It's obvious for the banks, for Kuwait as a banking centre, that this does not look very good," a banking source said, criticising the measure as a political move.

The government and parliament have had a fractious relationship in recent years and an agreement on the loans' issue may make it easier for the government to get lawmakers' support to pass other legislation.

"I think the legislation first of all is a clear reminder that although the make-up of parliament has changed its populist nature has not," Liz Martins, senior regional economist at HSBC in Dubai, said.

"It is telling that in a time that the government is looking to push ahead with its national development plan, and sees this parliament as an ally in that, the bank loan write-off is the most concrete action parliament has taken," she said, adding that the plan was nevertheless affordable for wealthy Kuwait.

GIFTS TO KUWAITIS

Around 47,000 Kuwaitis are eligible for the plan, known as the "family support fund." There are about 3.7 million people living in Kuwait, 1.2 million of them Kuwaiti nationals.

It is not the first time Kuwait has given out financial aid to its citizens.

In 2011, to mark three major anniversaries, ruler Sheikh Sabah al-Ahmad al-Sabah granted 1,000 dinars to each Kuwaiti and free food rations for 13 months.

Kuwait's oil wealth and generous welfare state have helped to shield the Gulf country from severe Arab Spring-style unrest, although there have been demonstrations over political participation and other local issues.

Wednesday's bill passed with 50 votes for, four against and three abstentions.

"It is unfair and unhelpful to the country," Fouad Abdulrahman Alhadlaq, deputy general manager at Al Dar Asset Management in Kuwait, said, commenting on the law.

"Four percent of the Kuwaiti population benefits from it and it also punishes those dealing with Islamic banks."

Lawmakers had originally sought a complete bailout of billions of dollars of household debt but met strong resistance from policymakers who said the plans were not feasible.

"There were a lot of people who were enthusiastic in taking out loans and now they are stuck," MP Nabeel al-Fadhl said. The plan means that borrowers will pay back their loans to the government at a suitable rate and in proportion to their income, he said.

The International Monetary Fund said last year that Kuwait will have exhausted all of its oil savings by 2017 if it kept spending money at the current rate.

($1 = 0.2855 Kuwaiti dinars)

(Additional reporting by Mahmoud Harby, Ahmed Hagagy and William Maclean; Editing by Yara Bayoumy and Susan Fenton)

((sylvia.westall@thomsonreuters.com)(Kuwait Newsroom +965 2240 8945)(Reuters Messaging: sylvia.westall.thomsonreuters.com@reuters.net))

Keywords: KUWAIT PARLIAMENT/DEBT