Genome-wide association studies have revealed >60 loci associated with type 2 diabetes (T2D), but the underlying causal variants and functional mechanisms remain largely elusive. Although variants in TCF7L2 confer the strongest risk of T2D among common variants by presumed effects on islet function, the molecular mechanisms are not yet well understood. Using RNA-sequencing, we have identified a TCF7L2-regulated transcriptional network responsible for its effect on insulin secretion in rodent and human pancreatic islets. ISL1 is a primary target of TCF7L2 and regulates proinsulin production and processing via MAFA, PDX1, NKX6.1, PCSK1, PCSK2 and SLC30A8, thereby providing evidence for a coordinated regulation of insulin production and processing. The risk T-allele of rs7903146 was associated with increased TCF7L2 expression, and decreased insulin content and secretion. Using gene expression profiles of 66 human pancreatic islets donors', we also show that the identified TCF7L2-ISL1 transcriptional network is regulated in a genotype-dependent manner. Taken together, these results demonstrate that not only synthesis of proinsulin is regulated by TCF7L2 but also processing and possibly clearance of proinsulin and insulin. These multiple targets in key pathways may explain why TCF7L2 has emerged as the gene showing one of the strongest associations with T2D.