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Insulin gene mutations are a leading cause of neonatal diabetes. They can lead to proinsulin misfolding and its retention in endoplasmic reticulum (ER). This results in increased ER-stress suggested to trigger beta-cell apoptosis. In humans, the mechanisms underlying beta-cell failure remain unclear. Here we show that misfolded proinsulin impairs developing beta-cell proliferation without increasing apoptosis. We generated induced pluripotent stem cells (iPSCs) from people carrying insulin (INS) mutations, engineered isogenic CRISPR-Cas9 mutation-corrected lines and differentiated them to beta-like cells. Single-cell RNA-sequencing analysis showed increased ER-stress and reduced proliferation in INS-mutant beta-like cells compared with corrected controls. Upon transplantation into mice, INS-mutant grafts presented reduced insulin secretion and aggravated ER-stress. Cell size, mTORC1 signaling, and respiratory chain subunits expression were all reduced in INS-mutant beta-like cells, yet apoptosis was not increased at any stage. Our results demonstrate that neonatal diabetes-associated INS-mutations lead to defective beta-cell mass expansion, contributing to diabetes development.