Oakes, who was loaned out to Crewe during last season, was told by boss Micky Adams that he would be allowed to leave the Foxes at the end of the last campaign.
"This move will help Stefan to resurrect his career, and at 24, with the tremendous technical ability he possesses, time is on his side to climb back to the top," Walsall manager Colin Lee told the Sadlers official website.
"I have a lot of belief in this player, he is very gifted, and with the right encouragement I believe he can become a very good player for us.
"He is a good passer of the ball, and will add a new dimension to our free-kicks and corner-kick opportunities."