He had been anointed as heir-apparent for the 2014 elections when Bingu wa Mutharika was due to retire.
The dramatic cabinet reshuffle comes days after the burial of the former president at his farm on Monday.
Ms Banda had been vice-president since 2009 but later fell out with the president and became a fierce critic.
She was forced to resign from his Democratic Progressive Party in 2010 when she refused to endorse his choice of Peter Mutharika to succeed him.
In the wake of Mr Mutharika's death on 5 April, there had been concerns that allies of the foreign minister would try to stop the constitutional transfer of power to Mrs Banda, who had set up her own political party.
Critics make cabinet
The BBC's Raphael Tenthani in Blantyre says other Mutharika loyalists were fired, but President Banda also made some surprise appointments, announced at a press conference on Thursday evening.
The son of former President Bakili Muluzi, Austin Atupele Muluzi, enters cabinet as the economic planning and development minister.
A presidential hopeful from his father's former ruling United Democratic Front, he was drawing big crowds at opposition rallies this year and was arrested for inciting violence after political unrest in Lilongwe.
Lawyer and activist Ralph Kasambara, who was also detained by police recently - after making comments about Mr Mutharika's dictatorial tendencies - has also been given a cabinet position.
He becomes justice minister and attorney general - a post he held when Mr Mutharika first came to power in 2004.