DUBAI, May 31 (Reuters) - Saudi Arabia's Bank Al Jazira has priced a 2 billion riyal ($533 million) sukuk issue that will boost the lender's capital reserves, a source aware of the matter said on Tuesday.

One of the kingdom's smallest banks by assets, Bank Al Jazira priced the transaction at 190 basis points over the six-month Saudi interbank offered rate (SAIBOR).

The Islamic bond issue, which will improve its supplementary Tier 2 capital level, is structured with a ten-year lifespan but includes an option for the lender to redeem the sukuk after five years.

It was arranged by GIB Capital as well as the bank's own investment banking arm.

Bank Al Jazira did not respond immediately to a request for comment.

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

Bank Al Jazira's total capital adequacy ratio (CAR) -- a combination of core Tier 1 and Tier 2 capital and a key indicator of financial health -- is one of the lowest among Saudi lenders but remains high compared with Western banks.

According to its financial statements, Bank Al Jazira's CAR was 15.08 percent at the end of March, against a regulatory minimum of 8 percent. ($1 = 3.7503 riyals) (Reporting by David French; Editing by David Goodman) ((davidj.french@thomsonreuters.com; +971 4 362 5864; Reuters Messaging: davidj.french.thomsonreuters.com@reuters.net))