Quite a few people have said that Kermit and Steve Martin should have done this a long time ago, but Kermit is associated with the banjo more than he has actually played it. Outside of The Muppet Movie and later performances of The Rainbow Connection (and in a bit of merchandise), he really hasn't played the banjo that often. A few non-Rainbow Connection examples include a brief scene in The Muppets Take Manhattan (during the "You Can't Take No for an Answer" montage) and at the beginning of The Muppets at Walt Disney World.
In fact I don't associate Steve Martin with the instrument much, either. When I first saw his episode of The Muppet Show I did, and then I learned he was a comedian instead of a musician and didn't.