Summary Background Albuminuria is the standard biomarker for the diagnosis of diabetic nephropathy (DN). However, some patients with persistent microalbuminuria still progress to chronic kidney disease, raising the question of finding a better biomarker. This study aimed to evaluate the correlation of urinary liver-type fatty acid-binding protein (L-FABP) levels with renal function and to compare the role of urinary albumin-to-creatinine ratio (ACR) with urinary L-FABP in early detection of DN in type 2 diabetic patients. Methods The cross-sectional study was done on 106 type 2 diabetic patients and 30 non-diabetic people. L-FABP was measured with the Latex enhanced immunoturbidimetric technique. Results There was a strong and negative correlation between the urine L-FABP levels and eGFR (r = -0.606, p<0.001). The urinary L-FABP levels were significantly higher (p<0.001) in the normoalbuminuria diabetic group than the non-diabetic control group. The ROC-curve analyses in the diabetic patients and the normoalbuminuria diabetic patients showed that the AUCL-FABP was remarkably higher (p<0.001) than the AUCACR. An optimal cutoff value of 5 mg L-FABP/g Cr (with the sensitivity of 98.1% and specificity of 90%) and of 4.3 mg L-FABP/g Cr (with the sensitivity of 100% and specificity of 86.67%) was set to detect DN in the diabetic patients and the normoalbuminuria diabetic patients, respectively. Conclusions The change in urinary L-FABP levels happened earlier than in urinary albumin during renal function impairment. Urinary L-FABP can be used as a better indicator than ACR for early detection of DN in type 2 diabetes.