The German bank will have a full-function licence for deposit and credit facilities and will offer fully Shariah-compliant services, Hamad Abdul-Mohsin Al-Marzouq, chairman of the KFH and its subsidiary Kuwait Turk, said in a statement.
The new bank will operate under the Kuwait Turk subsidiary and will be called KT Bank AG. Its headquarters will be in Frankfurt, KFH said.
There are approximately four million Muslims in Germany Al- Marzouq said. The new bank will, however, target the whole German market, before expanding across Europe through "new branches, companies and banks", the statement said.
Kuwait Turk already has one branch in Germany, in Mannheim.
Chief executive officer of Kuwait Turk Ufuk Uyan said that the German government's approval of the licence is an important step in the bank's expansion plans in Europe.
"We are fully confident that KT Bank AG will be the first choice house bank in Germany in its category," he said.
Kuwait Finance House was the first Islamic bank set up in Kuwait, in 1977, it said in its 2014 annual report.