Macroinvertebrates have been identified as excellent indicators of stream/ wetland health as they respond rapidly to environmental changes and provide short to medium term pollution history records. Current study was aimed to develop a Macroinvertebrate-based Index of Biotic Integrity (M-IBI) which is a new approach to monitor stream/wetland health of Colombo-Sri Jayewardenepura canal system. Sixty eight macroinvertebrate samples were obtained using a D-framed kick net from ten stations namely Kotte, Nawala, OUSL, Kirimandala Mw., Wellawatta, Orugodawatta, St. Sebastian, Beira Lake, Buthgamuwa and Royal Park representing main branches of the system and marshes covering dissimilar environmental conditions of the canal system during the period of Nov. 2008 to June 2009 on monthly basis. Habitat characteristics and some water quality parameters also recorded. For the index development, those ten stations were grouped into two as 'Reference' and 'Degraded' based on their environmental conditions. Then ten candidate metrics were selected out of 41 for M-IBI development after evaluating their sensitivity and appropriateness. Validity of the index was tested with a new independent data set. Scores acquired were positively correlated with DO values (r = 0.578). That concluded the potential of using M-IBI developed for biological monitoring and improving biotic integrity of streams/ wetlands.