Finasteride (Propecia) is a synthetic 4-azasteroid compound that is a specific inhibitor of type II 5-alpha reductase. 5-alpha reductase is the enzyme that converts testosterone (T) to dihydrotesterone (DHT). With decrease in DHT, hair follicles that would be susceptible to hair loss via the presence of DHT would have a lower likelihood of loss and also conversion of vellus hairs back to terminal hairs. The type II 5-alpha reductase isoenzyme is found predominantly in the hair follicles (and prostate).
See:
Finasteride White Paper and
Finasteride in Women