Type 1 diabetes mellitus (T1DM) requires innovative strategies to restore insulin production while overcoming immune rejection and limited donor availability. In this study, we developed a bioengineered insulin-producing tissue (IPT) by combining isolated pancreatic islets with adipose-derived stem cells (ADSCs) on a decellularized kidney extracellular matrix (k-ECM). Instead of discarding the substandard conditions islets, we demonstrate that they provide valuable bioactive signals like cytokines, growth factors, and extracellular matrix cues, which promote ADSCs differentiation into functional insulin-producing cells (IPCs). Moreover, the vascularized microstructure of k-ECM closely resembles pancreatic tissue, further supporting islet viability, and the co-culture of islets with ADSCs promotes revascularization and immunomodulation. In vitro results demonstrated that islet/ADSC/k-ECM enhances structural support, insulin secretion, and ADSC differentiation into IPCs. In vivo implantation of the islet/ADSC/k-ECM construct in a rat T1DM model restored fasting blood glucose (FBS), increased insulin secretion, angiogenesis, muscle thickness, immunomodulatory effects, and differentiation of ADSCs into IPCs, confirmed by immunohistochemistry (IHC) and RNA-seq. Collectively, this study demonstrates that the islet/ADSC/k-ECM (ILAE) construct creates a vascularized, insulin-producing, and immunomodulatory microenvironment, offering a promising strategy toward advancing the development of bio-artificial pancreatic tissues for T1DM therapy.