How can aqueous KOH give alcohol by SN2 of alkyl halide?
When you are considering a particular SN2 reaction, you have to consider the nucleophilicity as well as the nature of the leaving group of both the groups.

Here as you mentioned, $\ce{OH-}$ and $\ce{I-}$  (and other halide ions, except $\ce{F-}$, which is a very bad nucleophile) have comparable nucleophilicity in protic solvents. But, as for their leaving nature, $\ce{I-}$ (as well as other halides) is far more better leaving group than $\ce{OH-}$, because we know weak bases are better leaving groups. That is why the reaction is feasible.