* Sukuk prices at par with profit rate of 2.95 percent
* Pricing tightened at launch
* Deal is bank's second dollar debt sale (Adds launch details)
DUBAI, April 9 (Reuters) - Sharjah Islamic Bank (SIB) sold a $500 million five-year Islamic bond at tighter pricing than initially indicated due to strong demand for sharia-compliant debt from the Gulf Arab region.
The sukuk, maturing in 2018, priced at par with a profit rate of 2.95 percent, at the lower end of the final guidance range of between 2.95 percent and 3 percent.
Islamic banks have stepped up sales of sharia-compliant debt to meet their liquidity requirements and also to increase their capital reserves.
Demand for the sukuk was high, and the order book was over $2 billion when the official guidance was released.
SIB, rated BBB+ by Standard & Poor's and Fitch Ratings, is 31-percent owned by the government of Sharjah, the third-largest emirate in the United Arab Emirates. Kuwait Finance House (KFH) holds a 20 percent stake in the Islamic lender.
Its existing sukuk, a $400 million 4.715 percent issue maturing in 2016, was bid at 106.9 cents on the dollar on Tuesday afternoon, according to Thomson Reuters data, to yield 2.4 percent.
One trader said the new issue offered a negligible premium for a two-year extended maturity, and that this may lead to a weakening in secondary markets.
In recent bond and sukuk issues in the region, heavy bids caused pricing to tighten dramatically in the primary market, setting the bonds up to fall in the secondary market when it becomes clear that underlying demand for them at the final pricing is not as great as the order books suggested.
Proceeds from the sukuk are expected to be transferred to the bank through a special purpose vehicle, according to a company prospectus.
Abu Dhabi's Al Hilal Bank, HSBC Holdings, Kuwait's Liquidity Management House, a unit of KFH and Standard Chartered Plc are mandated lead arrangers on the sukuk. (Reporting by Rachna Uppal and Mala Pancholia; Editing by David French and Louise Heavens)