Cell therapy is one of the proposed treatments for diabetes. Cell encapsulation and differentiation inside the biodegradable polymers overcome the limitations such as islet deficiency and the host immune responses. This study was set to encapsulate the mesenchymal stem cells (MSCs) and differentiate them into insulin-producing cells (IPCs). Human bone marrow-mesenchymal stem cells (hBM-MSCs) were encapsulated in alginate/trimethyl chitosan/alginate (Alg/TMC/Alg) coating. At first, morphology and swelling properties of the cell-free microcapsules were investigated. Next, a three-step protocol was used in the presence of exendin-4 and nicotinamide to differentiate hBM-MSCs into IPCs. Viability of the encapsulated cells was investigated using MTT assay. The differentiated cells were analyzed using a real-time RT-PCR to investigate Glut-2, Insulin, Pdx-1, Ngn-3, nestin, and Isl-1 gene expression. The results revealed that differentiation of the encapsulated cells was higher than non-encapsulated cells. Also, dithizone staining in two-dimensional (2D) environment showed the differentiated cell clusters. In summary, here, hBM-MSCs after encapsulation in Alg/TMC/Alg microcapsules, as a new design, were differentiated properly in the presence of exendin-4 and nicotinamide as main inducers. A three-dimensional (3D)matrix is more similar to the native ECM in the body and prepares higher cell-cell contacts.