At stake is her re-election next year and the aid the poor Southern African nation is so dependent on.
The country's traditional donors, which contribute about 40% of the total budget, have threatened to pull the plug if she does not deal with what is known as the "Cashgate" scandal in which more than $2.5-million is said to have been stolen by some in the civil service. The government has now shut down its payroll, delaying the salaries of over 150 000 public servants.
The allegations of corruption and embezzlement are seen as a massive setback for Banda, who faces elections next year in May – two years after she assumed power following the death of president Bingu wa Mutharika from a heart attack in April 2011. Many believe that how she responds to the crisis will define her presidency.
"This crisis can make or break Joyce Banda … it will define her leadership and help her win the election if she manages it well and brings the culprits to book," said Gift Trapese, one of Banda's well-known critics.
In reaction to the crisis, Banda dissolved her 32-member Cabinet on her return from New York last week where she attended the United Nations General Assembly. Influential donors, led by the European Union, have piled pressure on Banda to get to the bottom of the scam.
On Wednesday, she announced a new Cabinet that did not include former finance minister Ken Lipenga. This was seen as an attempt at cleaning up the treasury.
"As I said before, I will not spare anyone and I will not allow this to happen ever again as long as I am president of Malawi," Banda told the <em>Mail & Guardian</em> immediately after the swearing in of the Cabinet. "We will get to the bottom of it."
The British high commissioner to Malawi, Michael Nevin, lauded Banda's remarks, saying his government would support her in her efforts to rid the country of corruption and that Britain would send forensic experts to assist with the investigation.
"We agree that this is a golden opportunity to comprehensively deal with fraud, theft and corruption. We welcome statements that there will be no sacred cows and that the investigating authorities are receiving further funding from government to get to the bottom of all this, to lead wherever it may lead," Nevin said.
Banda also dropped the influential justice minister, Ralph Kasambara.
A joint investigation into Cashgate by the anti-corruption bureau and police has implicated top treasury officials.
So far, 10 junior officers in the public service have been arrested after being found with money hidden in their cars and houses.
The Reserve Bank of Malawi has also sealed 21 bank accounts belonging to several suspects, who are said to include top officials.
Both Lipenga and Kasambara have denied any involvement in the malfeasance.
Banda has won acclaim in the West for austerity measures and moves to bolster the economy, which was in a tailspin under Mutharika.
But steps such as an International Monetary Fund-backed devaluation of the kwacha have stoked inflation, raised the price of food for the rural poor and eroded Banda's domestic support.