Liposomes have been used as carriers for drugs, toxins, enzymes, proteins/peptides and other bioactive materials there are several liposomal formulations that are being investigated in preclinical and clinical trials. Achieving high encapsulation as well as retention of the encapsulated drug is very important in developing liposomes as drug carriers. A high drug-to-lipid ratio is likely to reduce the cost of formulations and also the risk of lipid-induced toxicity following their injection. Comparison of the encapsulation efficiency of the drug in liposomes with the therapeutic dose indicates whether, in principle, liposomes can be used as a delivery system for that drug. The optimization of the liposomal encapsulation of a drug is usually based on trial and error, rather than on a thorough investigation of the factors affecting it. To obtain optimum encapsulation of a drug into a liposomal preparation, parameters influencing both the liposome and the drug need to be carefully considered during the early stages of development. In this review, factors that affect encapsulation of drugs in liposomes such as liposome size and type, charge on the liposome surface, bilayer rigidity, method of preparation, remote loading, addition of ion pairing, and complexing agents and characteristics of the drug to be encapsulated are discussed.