I dont want to mess with the current weapon system to much. I am kinda scared of weapon decay, well for a number of reasons. Some people have many weapons, and it would just become a hassle to have to use an iron bar and somethign else to repair it. Say you have 10 weapons...well using 10 iron bars at a time to keep everything in good condition would become stressful.
It would be good, I think, to have a weapon for each kingdom that only kingdom members can use. If you get kicked from the kingdom or leave, you could still own the weapon, but trying to equip it you would get a error saying you arent in that kingdom heh.
Also if these kingdom specific weapons were a bit more powerful than normal craftables, it would promote each kingdom to use their prefered combat weapon, if you look at it from a roleplaying standpoint.

But not as strong as event weapons x.x
I dont really like the idea of allowing villages of one kingdom to be located on the mainlands of others. That totally decentralizes the government..like to much. Besides, it would become a hassel to have to travel so much to reach each part of your kingdom. Islands are not such a big deal.
Its also not such a good idea to make items become property of your kingdom when you spend lots of money to improve them..