Encapsulation of pancreatic islets has been proposed and investigated for over three decades to improve islet transplantation outcomes and to eliminate the side effects of immunosuppressive medications. Of the numerous encapsulation systems developed in the past, microencapsulation have been studied most extensively so far. A wide variety of materials has been tested for microencapsulation in various animal models (including nonhuman primates or NHPs) and some materials were shown to induce immunoprotection to islet grafts without the need for chronic immunosuppression. Despite the initial success of microcapsules in NHP models, the combined use of islet transplantation (allograft) and microencapsulation has not yet been successful in clinical trials. This review consists of three sections: introduction to islet transplantation, transplantation of encapsulated pancreatic islets as a treatment for patients with type 1 diabetes mellitus (T1DM), and present challenges and future perspectives.