By David French and Tom Arnold

DUBAI, May 16 (Reuters) - Two of Saudi Arabia's smaller banks by assets are planning to sell Islamic bonds, or sukuk, in the coming weeks which will bolster their capital reserves, sources familiar with the matter told Reuters.

Bank Al Jazira 1020.SE will meet local fixed income investors this week ahead of a sukuk sale which will improve its Tier 2, or supplementary, capital levels, according to one source.

The transaction will likely run for ten years but include an option for the lender to redeem the sukuk after five years. It is being arranged by GIB Capital, as well as the bank's own investment banking arm, the source added.

Meanwhile, Bank Al Bilad 1140.SE has chosen HSBC's Saudi Arabian arm to arrange its own Tier 2-enhancing sukuk issue, two sources aware of the matter said.

Marketing of the transaction is expected to start before the holy month of Ramadan, which is due to begin around June 6 or 7.

Bank Al Bilad didn't immediately respond to a request for comment. Bank Al Jazira couldn't be reached for comment.

Saudi Arabian lenders have been selling capital-boosting sukuk in the last two years to increase their reserves after a long period of strong loan growth in the kingdom.

Among Saudi lenders, Bank Al Jazira and Bank Al Bilad have among the lowest total capital adequacy ratios (CAR) - a combination of core Tier 1 and Tier 2 capital and a key indicator of financial health.

Despite this, the levels of capital held by both banks are high compared with Western counterparts due to the kingdom's conservative regulatory approach.

According to their respective financial statements, Bank Al Jazira's CAR was 15.83 percent at the end of 2015. At the same point, Bank Al Bilad's CAR was 15.88 percent.

(Editing by William Maclean and Mark Potter) ((davidj.french@thomsonreuters.com; +971 4 362 5864; Reuters Messaging: davidj.french.thomsonreuters.com@reuters.net))