This is why banking regulation and licensing exists. It's also well understood that a bank will do this with your money, while a regular custodian should not.
If he'd made it clear upfront that the funds would be loaned to a risky business venture, with no reward, and people still chose to trust him with money then arguably that would be fine from a moral standpoint, but he didn't, and I'm sure he didn't because he knew nobody would have agreed to it.
This is exactly how banks operate.