Graduation out of chronic poverty has recently been receiving considerable attention globally for its potential synergies with social protection, microfinance and livelihoods development approaches to poverty reduction. This paper examines the evidence regarding the effectiveness of graduation strategies in reducing extreme poverty, with a particular focus on rural households. Data have been collected from archives, interviews and published research. However, this inquiry goes beyond a literature review. We attempt to deepen our understanding of alternative theories of change underpinning the CGAP-Ford Foundation graduation model and investigate the enabling and disabling contextual factors that affect the efficiency and effectiveness of graduation programmes. We use two research strategies: (1) a quantitative analysis of country-level graduation pilot programmes, and (2) a qualitative inquiry into the mechanisms of capability building, with a particular focus on the interaction between household and contextual factors. Based on available evidence, we propose a new analytical framework to support future programmatic work on graduation. We conceptualize graduation as a learning and adaptation process of alignment between motivation, knowledge and practice whose outcomes are highly dependent on contextual factors in general and initial endowments in particular. We conclude that graduation could become a new dimension in IFAD operational strategies under clearly identified conditions.