Why would Dante have placed Saladin in Limbo, in the castle with the virtuous pagans such as Socrates, Plato, Caesar, Ptolemy, Galen, etc. He also notes the Saladin was separated from the others and sat alone. It seems to me that Saladin would have been viewed as an enemy of the church, then again, my knowledge of The Crusades is severely lacking.
Saladin is a very interesting example of one way in which Europeans coped with and came to understand the Muslim "other" and also how they coped with and interpreted failure. In essence what we see in the development of the Saladin legend is the "domestication" of a dangerous foe.
The conquest of Jerusalem in 1187 by Saladin immediately threw Europe into a tizzy and there was a need to understand just how the successes of the First Crusade, so clearly granted by God, could have been undone. The end result was a belief by figures as varied as Pope Gregory VIII and anonymous poets that the defeat was a result of Christian sin and moral failings. Within this schema Saladin functioned as a tool of God, his victories were thus the result not of any innate abilities or the strength of Islam but of the Christian God's will.
So from the get-go Saladin is seen not within his own context but through a specific Western European lens. He is, in effect, transformed into a rhetorical tool.
The failure of the Third Crusade to recapture Jerusalem only heightens this. Again failure is placed firmly on the shoulders of the Crusaders and Latin Christians living in the Holy Land. But we also see the image of Saladin transforming.
He is still a "scourge" for God to punish the Christians but he also becomes a "mirror" by which Christian failing can be emphasized. Chroniclers and poets who write of the Third Crusade emphasize Saladin's chivalric behavior as a means of emphasizing the poor behavior of people like King Philip II of France. If a heathen king can act so well, surely Christians (who have the true word of God) should be able to as well.
Again we can see this as a "coping" mechanism, a way to explain loss at the hands of the heathen. The loss is less severe at the hands of a worthy foe than it would be to an unworthy one. This also allows for writers to make the failed crusade less a failure and more a glorious story, albeit one that ends without the recapture of Jerusalem. Partisans of Richard (the Lion Hearted) of England are especially responsible for this sort of presentation.
As John Tolan puts it in his book Sons of Ishmael: Muslims through European Eyes in the Middle Ages
The memory of a heroic struggle against a valiant and chivalrous adversary will be carefully preserved and cultivated by the descendants of the crusaders -- so much so that even the claim to have an ancestor taken prisoner by Saladin becomes a sign of prestige...
So Saladin is again more literary figure and rhetorical tool than historical or realistic person.
The "mythic" Saladin continues to develop and grow in fascinating ways. New stories are invented that more and more emphasize Saladin's chivalric and almost Christian behavior.
It is within this context that Saladin's appearance in Limbo should be taken.
By the time Dante is writing Saladin is a mythic figure, one responsible for treating captured Crusaders generously and well, for meeting in honorable combat with valorous Christian knights, for sending gold to the Templars for the support of poor and sick pilgrims and crusaders.
By the fifteenth century the legend develops so far that Saladin is said to have secretly visited Europe, able to pass as a white European knight. Some stories go so far as to have Saladin baptized on his death bed!
John Tolan's Sons of Ishmael, quoted above, is the best place to start. The entire book is great for introducing you to the complexities of the medieval world and of inter-religious and cross-cultural interaction. It is quite accessible and a fun read, and Tolan is probably the go-to scholar on this topic right now.
If you have access to a good library and want a bit more "homework" you might also be able to track down David Blanks' and Michael Frassetto's Western Views of Islam in medieval and early modern Europe which contains quite a few interesting articles on this sort of topic. Jo Ann Hoeppner Moran Cruz's Popular Attitudes towards Islam in Medieval Europe in particular has some good stuff in it.
Both of these sources discuss numerous medieval poems, histories and the like which you could track down if you want more fun primary sources.
Not a pro historian here but I will give you what I know. Saladin was respected by many Christians because of his honor and chivalry. Dante placed him in Limbo because, though he lived his life in a respectful manner, he did not do it through Jesus Christ; so, like Plato, Ceasar, etc., he was placed in Limbo. Dante used Limbo in this sense to place deceased men who where noble but, because of the time or location of where they lived, missed out on Christianity and its idea of salvation. I should also note that Dante defied the Catholic Church in his placement of many people, and his ideas of where certain people would be in the afterlife w ould differ from what the Catholic dogma would say.
Limbo in Dante's view was a place for people who lived honorably in their own way but were not Christian or lived in a time before Christ i.e.Plato and Socrates.
Saladin was the sultan of Egypt and Syria at the time of the crusades. He was an amazing general and won battles against crusading armies but what made him chivalrous was his behavior after his victories.
Saladin didn't outright slaughter innocents for just being Christian, they could even leave occupied areas and seek refuge in other crusader controlled lands. Saladin even allowed defeated armies to retreat unharassed. (The First encyclopedia of Islam-EJ Brill )
Crusader armies at the time did some questionable things like under the command of Raynald of Chatillon caravans of innocent Muslims performing Hajj were pillaged. (Studies of Church history-Hamilton Bernard) Richard the Lionheart after his siege of Acre executed close to 3000 Muslims, women and children included. (Richard the Lionheart Massacres-Gillingham, John)
Saladin allowed captured Franks to pay a low ransom for their individual freedom and waived it for those who had no money. (The capture of the holy land by Saladin-Stevenson, Joseph).
These are just some of the reasons why Saladin, in some western circles, was considered chivalrous and honorable. He acted in some times more merciful than the armies who were waging war with him. Dante recognized Saladin's just actions even though they were against the Christian world at the time and thus put him in limbo. An honorable man who happened to be on the opposing side of a war.