Muhammad to unite the arabian peninsula under a common religion. he also reunites the peninsula under a common language, arabic. why would a common language and religion unite a group of people?

dylan has written many enduring songs and he has received several awards for his musical achievement;  

any written work with artistic value can be considered literature; especially if such work is publicly recognized, and has had importance and endurance among people; whether is poetry or fiction or drama or even criticism, since it's the transcendence and representation of a culture, language or people in a period of time to more people, using letters (words), regardless the subject.

the nobel prize in literature is given to authors from any country based on a body of work as a whole that inspires and nurses the life of humanity.  

and the work of bob dylan matches that description, therefore is well deserved since he'd created new poetic expressions within the american song tradition, that has inspired and influenced the lives of many people, not only withing the united stated but worldwide as well.