While literature is derived from the Latin littera, meaning word, literature has also been defined as the recordings of the human spirit. After all, such ancient classics as The Odyssey and Beowulf were oral tradition long before they were written down as were myths and legends. In fact, the Greeks revered the oral culture over the written.
Much of the oral literature is highly developed in metaphor just as is the written. Words are as powerful and alive, perhaps more so, than letters. For Native Americans, for instance, speech, or oratory--often relying on striking similes drawn from nature--is a highly developed and respected literary form. Indeed, it is as much a recording of the human heart as is written literature.
Literature is a written story of the human condition. It tells of the best and worst of who we are, how we react when we're grieving or in love, and what we think--good and evil--in the deep recesses of our hearts. It is storytelling.
I'd make the case that oral literature is, in fact, true literature. A case in point is Beowulf. This is an epic poem which was sung/performed orally for hundreds of years before it was finally transcribed into written word. Over the course of time it grew and changed--as most stories do. We read it today, in a variety of both poem and prose translations, as literature. How about The Iliad and The Odyssey? Same kind of thing.
I would only make this distinction: all storytelling is not oral literature, just as all writing is not literature. It must rise above the mundane and silly; if it captures and relates the richness of human nature and experience, it has a valid place in the world of literature.
Oral tradition in literature has seen a major revival of interest with the coming of the so-called postcolonial studies, shifting the exclusive focus from European texts and focalizing the 'third world' literature of the once-colonized countries. In a postcolonial strategy of returning to the precolonial past in terms of the literary tradition is also about returning to the orality of that literary past in the form of the native epics, rendered orally.
In a lot of this kind of literature, it is a trend to incorporate these oral forms. Performance poetry in Africa is an example. Salman Rushdie's use of the local 'kissa' (story) form in novels like Midnight's Children or Shame, Raja Rao's use of the 'sthalapurana' in Kanthapura and the epical structures used in R.K. Narayan's The Guide are all examples of this.