This is a photo from 1937, showing Mussolini in Tripoli raising the Sword of Islam.
Two interesting details: the original picture showed an Arab leading the horse. It was brushed away from the official picture because it was not proper that il Duce needed some help in controlling the horse; the so-called sword of Islam was forged by a Florentine artisan who had been commissioned the artifact by Mussolini itself. The sword was presented to him by a tribal chief who was supporting Italian administration.
It is anyway true that Mussolini during the 1930s was quite supportive of Islam in Libya and in Eritrea: in particular in Libya he supported mosques and schools of Islamic learning, the most important of which was founded with his patronage in Tripoli itself.
Besides this, the regime had good contacts with Arabian groups in Palestine, Syria and Iraq which were against the colonial domination by the French and the British, and provided them with training and funds. Once Libya had been pacified by Graziani during the 1920s (the pacification was quite harsh, but not much worse than the British pacification of Iraq or the Franco-Spanish war against the rebels in the Rif), the fascist regime tried seriously to win the heart of Libyans, and was reasonably successful at least in the settled zone along the Mediterranean coast and in the cities. The tribes of the interior were a different matter, but it was not different that it had been under the Ottomans.
Catholicism or lack thereof (Mussolini himself was not a believer, and the regime tolerated the church - in particular after the Concordat of 1929 - but never warmed up to it) have nothing to do with this pageant in Tripoli or with the support given to the ulemas who were toeing the line.
What he had in mind (or what he was hoping for) is not easy to discern. I think that the first and foremost goal was to insure the pacification of Libya, whatever might come after that (if and when the opportunity might arise) was much more nebulous, and I doubt that serious plans had ever been drafted for such an eventuality.