This is the flag of the Kingdom of Jerusalem. It comes from a world where the Crusades were a success. The Holy Land was placed under Christian control, as were Egypt and North Africa. The Kingdom of Jerusalem frequently changed hands between various Christian kingdoms, but eventually it was established as an independent kingdom in the same manner as the Papal States. There was a movement to have the Pope and College of Cardinals to move to Jerusalem, and for a few years they did, but it was ultimately decided that Jerusalem wasn't safe enough. Rome remained the heart of Catholicism, but the church still has several important institutions in Jerusalem. Similarly, the Orthodox Church has a Patriarch of Jerusalem who lives in the kingdom.
As a result of the successful Crusades many Muslims fled to West Africa. By the present day West Africa, and Timbuktu in particular, have become the heart of Islam. The Christian kingdoms of North Africa tend to have Christian coasts and Muslim interiors. Jerusalem and its fellow Christian Levant kingdoms are...well, predominantly Christian. Jerusalem comprises most of the territory that modern day Israel and Palestine consist of.
For many years Jews and Muslims have faced discrimination in Jerusalem. Today, however, people of all religions enjoy equal protection under the law. Jerusalem has increasingly placed effort into making amends for the past. For example, the Dome of the Rock for many years had been converted into a church, but in recent times it was converted into a secular museum where everyone is allowed to pray.
This is reflected by the symbolism of the flag. Christian elements are still dominate, purple and gold represent both royalty and Jesus Christ, and a cross dominates the center. However, the cross is an equal armed Templar cross the represent the equality of all, and the Stars of David and crescent moons represent the importance of Jerusalem to Jews and Muslims as well as Christians.