DUBAI  - Saudi Arabia has begun selling local currency government bonds through a new "primary dealer" scheme designed to increase demand for the debt and widen the range of investors holding it, the Ministry of Finance said.

The ministry's Debt Management Office issued 3.5 billion riyals ($925 million) of five-, seven- and 10-year Islamic bonds under the system this week in its monthly auction, the ministry said in a statement late on Wednesday.

Five local banks -- Alinma Bank, Bank Aljazira, Samba Financial Group, National Commercial Bank and Saudi British Bank -- for the first time acted as primary dealers, buying the sukuk directly from the government and then immediately making a market in them by quoting two-way prices to other investors.

An electronic auction platform permitted over 20 investors from financial institutions and asset managers to submit bids for their own books and on behalf of their customers, the ministry said.

"Market-making will play an active role in stimulating the financial markets as a whole and significantly increasing the liquidity in the secondary market," it said.

Saudi Arabia wants to develop deep government and corporate debt markets to expand its financial industry, attract foreign capital, help the government finance its budget deficit and make it easier for private sector companies to fund themselves without relying on banks.

(Reporting by Andrew Torchia; Editing by Amrutha Gayathri) ((andrew.torchia@thomsonreuters.com; +9715 6681 7277; Reuters Messaging: andrew.torchia.thomsonreuters.com@reuters.net))