Human umbilical cord matrix-derived stem cells (uMSCs), owing to their cellular and procurement advantages compared with mesenchymal stem cells derived from other tissue sources, are in clinical trials to treat type 1 (T1D) and type 2 diabetes (T2D). However, the therapeutic basis remains to be fully understood. The immunomodulatory property of uMSCs could explain the use in treating T1D; however, the mere immune modulation might not be sufficient to support the use in T2D. We thus tested whether uMSCs could exert direct trophic effects on β-cells. Infusion of uMSCs into chemically induced diabetic rats prevented hyperglycemic progression with a parallel preservation of islet size and cellularity, demonstrating the protective effect of uMSCs on β-cells. Mechanistic analyses revealed that uMSCs engrafted long-term in the injured pancreas and the engraftment markedly activated the pancreatic PI3K pathway and its downstream anti-apoptotic machinery. The pro-survival pathway activation was associated with the expression and secretion of β-cell growth factors by uMSCs, among which insulin-like growth factor 1 (IGF1) was highly abundant. To establish the causal relationship between the uMSC-secreted factors and β-cell survival, isolated rat islets were co-cultured with uMSCs in the transwell system. Co-culturing improved the islet viability and insulin secretion. Furthermore, reduction of uMSC-secreted IGF1 via siRNA knockdown diminished the protective effects on islets in the co-culture. Thus, our data support a model whereby uMSCs exert trophic effects on islets by secreting β-cell growth factors such as IGF1. The study reveals a novel therapeutic role of uMSCs and suggests that multiple mechanisms are employed by uMSCs to treat diabetes.