Coconut kernel fiber (CKF) is a by-product of coconut oil processing; it is rich in protein and serves as a potential source of bioactive peptides. In this study, from the enzymatic hydrolysis products of CKF (CKFH), a low-molecular-weight CKFH component (LW-CKFH, 1–3 kDa), exhibiting 74.49% α-glucosidase inhibition and restoring glucose metabolism in IR-HepG2 cells to 71.37% of normal levels. In a type 2 diabetes (T2DM) mouse model, LW-CKFH alleviated insulin resistance and enhanced insulin sensitivity by repairing liver damage, thereby improving glucose and lipid metabolism and reducing inflammation; its effects on improving insulin resistance and sensitivity reached 75.43% and 75.47% of the efficacy of metformin, respectively. Molecular docking analysis identified FDLPAR, LPFPRPAGPR, and ANVFNPR as key active peptides responsible for inhibiting α-glucosidase activity. Furthermore, LW-CKFH exhibited good gastrointestinal digestibility and processing stability, while significantly reducing the glucose release rate from bread (>50%), indicating its suitability for the development of hypoglycemic or low-GI functional foods. LW-CKFH was particularly suitable as a functional ingredient for fruits, vegetables, grains, and dairy products to develop low-GI or hypoglycemic foods. This study provides new insights into the high-value utilization of the coconut processing by-product CKF.