First, you have to think about why they're asking. If they need the money for valid expenses and you just don't have it, be honest and offer any additional help you might be able to provide.
If you're not sure why they need the money, or you don't trust that they'll pay it back, then explain that you need what money you've got for right now, and don't elaborate.
Sometimes this question poses longer discussions, and if they're a good friend you should be honest and explain your reasoning. For instance, friends who want to borrow money for drugs should be told that you're not going to fund that type of behavior.
If this person has borrowed money from you before and didn't pay it back, then give that as your reasoning, and perhaps explain that if they pay you back for last time, you might be more willing to loan money in the future.
Honestly it's just a gut feeling and your reasoning should follow what you feel is appropriate for the refusal.