Pericapsular fibrotic overgrowth (PFO) is associated with poor survival of encapsulated pancreatic islets. Modification of the microcapsule membrane aimed at preventing PFO should improve graft survival. This study investigated the effect of macromolecular Corline Heparin Conjugate (CHC) binding on intrinsic properties of alginate microcapsules and assessed the anti-fibrotic potential of this strategy both in vitro and in vivo. CHC was bound to alginate microcapsules using a layer-by-layer approach incorporating avidin. CHC binding to alginate microcapsule was visualized by confocal microscopy. Effects of CHC binding on microcapsule size, strength, and permeability were assessed, and the anti-clotting activity of bound CHC was determined by coagulation assay. Effect of CHC binding on the viability of encapsulated human islets was assessed in vitro, and their ability to function was assessed both in vitro and in vivo in diabetic immunodeficient mice. The potential of bound CHC to reduce PFO was assessed in vivo in different rat transplantation models. Confocal microscopy demonstrated a uniform coating of CHC onto the surface of microcapsules. CHC binding affected neither size nor permeability but significantly increased the tensile strength of alginate microcapsules by ∼1.3-fold. The bound CHC molecules were stable and retained their anti-clotting activity for 3 weeks in culture. CHC binding affected neither viability nor function of the encapsulated human islets in vitro. In vivo CHC binding did not compromise islet function, and diabetes was reversed in all recipients with mice exhibiting lower blood glucose levels similar to controls in oral glucose tolerance tests. CHC binding was beneficial and significantly reduced PFO in both syngeneic and allogeneic rat transplantation models by ∼65% and ∼43%, respectively. In conclusion, our results show a new method to successfully coat CHC on alginate microcapsules and demonstrate its beneficial effect in increasing capsule strength and reduce PFO. This strategy has the potential to improve graft survival of encapsulated human islets.